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What’s disinflation, and why does it matter?

Sabri Ben-Achour Jul 30, 2020
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The menu of a ramen restaurant, for instance, can illustrate inflation, disinflation or deflation. Frederic J. Brown/AFP via Getty Images

What’s disinflation, and why does it matter?

Sabri Ben-Achour Jul 30, 2020
Heard on:
The menu of a ramen restaurant, for instance, can illustrate inflation, disinflation or deflation. Frederic J. Brown/AFP via Getty Images
HTML EMBED:
COPY

We heard from Federal Reserve Chair Jerome Powell on Wednesday that the shock the economy is going through right now is “disinflationary.” Disinflation is different from deflation. So what does it mean?

I am live on the scene, ladies and gentlemen. I’m on the corner of 50th and 10th in Manhattan. I’m outside of this ramen restaurant, and longtime diner and my roommate, Meng Chi, is here. Meng, can you tell me what happened?

“The [price of this] ramen went up by $3,” Meng said. He’s devastated, and said other restaurants’ prices stayed about the same.

So turns out that disinflation looks a lot like inflation. That’s because disinflation is inflation, just less of it on average.

“Disinflation is a slowing of the inflation rate,” said Alan Detmeister, economist with UBS.

So inflation is still happening overall, just not as much. Because while that restaurant’s prices are going up on 10th Avenue, other things are coming down. Over on 9th Avenue, you’ll find Darius Glover, a personal trainer with Gloverfit.com. He trains his clients outside now.

“Without the amenities and equipment I would normally have at my facilities, I lowered my rates 20, 30%,” Glover said.

Prices in the U.S. fell in March, April and May, but they’re turning around. And over the past year, prices are still rising. Slowing inflation is different from deflation.

“Deflation is something serious,” said Markus Brunnermeier, an economist at Princeton University. Deflation is sustained falling of overall prices over months and years. It squeezes companies and makes it harder to pay off old debts.

“And that makes bankruptcy levels go up and so forth, and that makes the whole economy go down,” Brunnermeier said.

That’s not where we’re at. The drops in prices look pretty temporary and not pervasive.

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