The Economic Goal of Price Stability
Simulate a consumer's experience when dealing with unstable prices.
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Video Q&A
0-15 min
Inflation, Deflation, and Disinflation
OVERVIEW
This video assignment shows the differences between inflation, deflation, and disinflation. The video explains it all with the help of detailed animations and graphs.
Inflation occurs when the prices of goods and services across the economy go up. Deflation occurs when prices across the economy go down. Prices go down? Sounds like deflation is a great thing. I know lower prices SOUNDS good, but deflation is usually a symptom of a down economy and has some pretty bad consequences. For instance, deflation happened during the Great Depression. There was less demand, so prices fell across the economy, businesses’ inventories grew, people were laid off, unemployment rose, and incomes fell. Also, people waited to buy things because they expected prices to be even lower in the future, so firms produce even less and laid off more workers. The cycle continued. Since too much inflation is bad for the economy and deflation is also bad, one of the Fed’s main goals is to keep inflation low and stable while avoiding deflation. A related term is DISINFLATION. That means a slowing of the rate at which prices are increasing; in other words, a DECREASE in the inflation rate. It’s not the same as deflation, when prices are ACTUALLY decreasing. For example, disinflation occurred from 1980 to 1983, when the inflation rate went from over 13% to under four percent.
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