Financial markets are worried about deflation, particularly in Europe but also elsewhere. In the U. However, global portfolio managers and strategists say these worries are exaggerated.
Low inflation is not the same as deflation; disinflation or low inflation is as good as deflation is bad. Deflation is characterized by sustained broad declines in both consumer and asset prices. Japan has had deflation for the past 20 years. Consumer prices fell in 11 of the years between and Japanese house prices fell every year from to and are up only slightly since then. The Nikkei stock index plunged to a low of 7, in April from 38, in December The index has not been higher than 18, since then.
GDP growth averaged 0. Disinflation is different. That means an economy can continue to grow for years. Normally, economies bounce back from recessions and, after five to six years of strong growth, they become overheated, with both wages and prices moving upward sharply.
Central banks then have to raise interest rates to cool down the strong demand. But there was no bounce-back after the global financial crisis and recession of ; just moderate growth. So, there are no signs of overheating and most global portfolio managers believe we are in a disinflationary period in most countries. The possible exception is Europe, where growth has been so weak that deflation is possible.
By last autumn, eurozone inflation had turned marginally negative, with consumer prices down by 0. But if Europe goes into recession, the downward price trend could continue. Japan also is a concern. The danger that disinflation presents is when the rate of inflation falls near to zero, as it did in , it raises the specter of deflation.
Although the rate of inflation was near zero in , concerns over deflation were dismissed because it was largely attributed to falling energy prices. As energy prices recovered in the period from to , the rate of inflation picked up somewhat, averaging 1.
The Bureau of Labor Statistics. Accessed Feb. Monetary Policy. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page. These choices will be signaled globally to our partners and will not affect browsing data.
We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Economy Economics. What Is Disinflation? Key Takeaways Disinflation is a temporary slowing of the pace of price inflation and is used to describe instances when the inflation rate has reduced marginally over the short term.
A healthy amount of disinflation is necessary, since it prevents the economy from overheating. The danger that disinflation presents is when the rate of inflation falls near to zero, as it did in , raising the specter of deflation. Article Sources. Investopedia requires writers to use primary sources to support their work.
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Related Terms Stagflation Definition Stagflation is the combination of slow economic growth along with high unemployment and high inflation. What Is Inflation? Inflation is a decrease in the purchasing power of money, reflected in a general increase in the prices of goods and services in an economy.
What Is a Soft Landing in Economics? A soft landing, in economics, is a cyclical downturn that avoids recession. What Is Reflation? Reflation is a form of policy enacted after a period of economic slowdown. Policies include infrastructure spending and cutting tax and interest rates.
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