DISINFLATION (Syllabus: GS Paper 3 – Economy)

Context: "The gains in disinflation achieved over the last two years have to be preserved and taken forward recently towards aligning the headline inflation to the 4 per cent target on a durable basis," the RBI Governor wrote in the minutes of the MPC.

Inflation

• About: Inflation happens when the cost of things goes up in an economy, which makes it harder for people to buy stuff and reduces the value of the money they have.
• Inflation tracks how the prices of a collection of goods and services change on average as time passes.
• Two main sets of inflation indices: The Wholesale Price Index (WPI) and the Consumer Price Index (CPI).

Disinflation

• About: It refers to a temporary deceleration in price inflation, indicating a slight decrease in the inflation rate over a brief timeframe.
• Measuring Disinflation: Unlike inflation and deflation, which signify the direction of prices, disinflation focuses on the rate of change in the inflation rate.
• Economic Stability: A controlled level of disinflation is essential to prevent the economy from overheating, ensuring a moderate and sustainable economic environment.
• Causes of Disinflation: Increases in the supply of money available for use in a nation's economy. 
• Response from Central Banks: Central banks frequently utilize monetary policy tools to address disinflation. 

Deflation and  Skewflation

• Deflation: It is the opposite of inflation: it's when prices fall instead of rise. In the U.S., deflation is happening across categories like food, energy and household goods, according to consumer price index data.
• Skewflation: It is a type of inflation in which the prices of a single commodity or a set of commodities rise while the overall price level remains stable.