2 Keys to Disinflation | June 16, 2017

Recently, concerns have risen that disinflation could indicate that our economy is losing steam. 1) What is disinflation and 2) Why does it present a risk to our economy?

What is disinflation?

Disinflation occurs when inflation figures moderate. Prices are still increasing, but at a continued slower rate than in the past. Most people would look at “disinflation” and first wonder, is it really a word (?), and second, think it means falling consumer prices. That is a description of deflation, a far greater risk to economic growth.

Why does it present a risk to our economy?

Moderate inflation is welcomed, as inflation in it’s true form represents an increase in demand beyond the capacity utilization rate (CUR) maximum. The CUR gives us an idea of how much slack there is in an economy. If companies are producing goods at full capacity, but demand continues to outstrip supply, the only thing that can happen is an increase in price. As prices slow their pace of increase, it begs the question; has our economy began to slow down and consumer spending/demand has softened to the extent that prices are moderating? If so, this would weaken prospects of future GDP.

Conclusion

The disinflation we are experiencing is mild. The Core Consumer Price Index (CPI) has fallen from a high in January of 2.3% to 1.7% for May. Remember, with disinflation prices are still rising, just at a slower pace. Also, CPI reports how prices have changed. It is actually a lagging indicator of how our economy was in the last 12 months, not the next 12.

 

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