The Cooling Economy: Disinflation v. Deflation

By Financial Advisor Carrie McDonnell

Since June 2022, inflation has fallen steadily from 9.1% to just 3.1% as of November 2023.¹ This dramatic drop has led the Federal Reserve to indicate that interest rate cuts are ahead in 2024, bringing a sign of relief to many. And yet, the costs of most everything are still high.

If the economy is cooling, why does everything still seem expensive?

The answer is in the difference between disinflation and deflation. Disinflation is what is occurring currently in our economy. It’s the decrease of inflation rates, which means prices are still rising but at slower rates than they were before. Grocery prices are a good example. Prices have only increased 2% in the last year compared to the stunning 12% the previous year.²

Deflation, on the other hand, is the reduction of the general level of prices in an economy. While many mourn the loss of pre-pandemic prices, it is important to know that deflation is not necessarily something to wish for, as it may be a sign of economic stress. Economists fear deflation because the prospect that things will cost less tomorrow than they do today encourages people to put off buying. If enough people do just that, then the reduced demand can lead to reduced business production, and, ultimately, layoffs and salary reductions.

The Federal Reserve’s goal, then, is not deflation but disinflation until our economy hits the sweet spot of 2%. At that rate, prices should be rising fast enough to avoid deflation, but slowly enough to avoid outpacing rising wages. Adjusting consumer expectations to align with the Federal Reserve, and understanding the difference between disinflation and deflation, may help Americans have a more accurate and brighter outlook on the overall economy.

1. www.us inflation calculator.com. “Current US Inflation Rates: 2000-2023.” December 2023.
1. www.npr.org. “Inflation has cooled a lot. So why do things still feel so expensive?” Scott Horsley. 16 Dec 2023.