Disinflation
A slowdown in the rate of inflation — prices still rise, just more slowly — distinct from deflation, where prices actually fall.
Disinflation is a decline in the rate of inflation while prices are still rising. CPI falling from 6% to 3% is disinflation: the cost of living keeps climbing, just at a gentler pace. It is the explicit goal of a central bank fighting an inflation overshoot — bringing the rate back toward target without tipping into outright price declines.
The key distinction traders must keep straight: disinflation is not deflation. Deflation means the price level is actually falling (a negative inflation rate) and is far more dangerous, often signaling collapsing demand. Disinflation, by contrast, is usually welcomed — it is what a successful soft landing looks like.
For markets, a credible disinflationary trend is bullish for both bonds and equities: it lets the central bank stop hiking and eventually cut, easing financial conditions. The risk is sticky disinflation, where the rate stalls above target on the way down, forcing rates to stay higher for longer than the market hoped.
Example
Core PCE eases from 4.0% to 3.2% to 2.6% over three quarters. Inflation is still positive — prices are higher than a year ago — but the steady deceleration is textbook disinflation. Markets price in the end of the hiking cycle and rally on expectations of coming rate cuts.
Related Terms
Consumer Price Index (CPI)
Tracks changes in the price of a fixed basket of consumer goods and services — the most closely watched inflation gauge.
BeginnerDeflation
A sustained fall in the general price level — the opposite of inflation — that can signal a collapsing demand environment.
IntermediateInflation
The rate at which the general price level of goods and services rises, eroding purchasing power over time.
BeginnerMonetary Policy
Central bank actions — rate changes, asset purchases, reserve requirements — designed to control inflation and support employment.
BeginnerSoft Landing
The ideal macro outcome: the central bank tames inflation through rate hikes without triggering a recession — rare but market-moving when achieved.
Intermediate