Definition
Disinflation is a decline in the rate of inflation. Prices are still going up, but the speed of the increase is falling. An economy where annual inflation drops from six percent to four percent and then to two percent is experiencing disinflation.
It is easy to confuse with deflation, but the two are different. Disinflation means slower price rises; deflation means an outright fall in the price level. Under disinflation the price index still climbs, just less steeply.
Why it matters
How it works
When inflation runs too high, a central bank raises interest rates to cool demand. As borrowing and spending slow, firms find it harder to push prices up as aggressively, and the inflation rate begins to fall. This gradual easing is disinflation. The aim is usually to guide inflation back toward a modest target, around two percent in many economies, without pushing it all the way to zero or into negative territory. If tightening goes too far, disinflation can tip into deflation, which is why policymakers monitor the pace carefully.