How can disinflation help stabilize an economy, and why is it usually better than sudden deflation?
Answer (1)
Disinflation refers to a slowing down of inflation—prices are still rising, but not as fast. This is generally seen as a good sign because it shows that inflation is under control, and the economy is stabilizing. Disinflation usually happens when the central bank raises interest rates or when demand cools down naturally.Disinflation helps businesses and households plan better. When prices rise slowly and predictably, people don’t panic. Workers can negotiate reasonable wages, companies can plan future costs, and consumers can budget wisely. In the Philippines, when inflation dropped from 6.7% in 2018 to below 3% in 2019, it was a relief for many. Prices were still going up, but much more slowly, allowing families to adjust.Deflation, however, is when prices actually fall. At first, it sounds good—cheaper goods, right? But if it continues, it can be very dangerous. People start to delay purchases, hoping for lower prices. Businesses lose income and cut jobs. That leads to less spending, more layoffs, and a downward spiral. This happened in Japan during its “Lost Decade,” where deflation led to slow growth and high debt.In contrast, disinflation is a controlled cooling off. It's like turning down the heat on a boiling pot—slow and steady—rather than dumping cold water and cracking the pot.Central banks aim for a 2% inflation rate, which is low enough to keep prices stable but high enough to avoid deflation. This “sweet spot” supports growth, spending, and investment.In summary, disinflation gives time to breathe, adjust, and balance the economy, while deflation often causes panic and reduced activity. That’s why policymakers prefer disinflation as a strategy to manage high inflation without hurting growth.
