Disinflation Yes, Deflation No
This article is published in collaboration with Statista
by Felix Richter
When the latest reading of the Consumer Price Index showed that inflation had cooled to the lowest level since March 2021, some people probably thought: “Great, inflation is cooling. But then why is everything still so expensive?” Unfortunately, it's not as simple as that.
Whenever we're discussing inflation coming down, it’s important to distinguish between disinflation and deflation. What we’re currently seeing is disinflation, i.e. a deceleration of price increases (yes, increases). For the overall price level to actually come down, the inflation rate would have to drop below zero, which would signify deflation. While the Fed desperately wants inflation to come back down, it is aiming for 2 percent inflation, not deflation, because the latter creates a whole set of problems on its own.
As the following chart shows, the rate of inflation (yellow line) has come down quite a bit from its June 2022 peak of 8.9 percent. Consumer prices (blue line) continue to climb, however, and are now 17 percent higher than they were in February 2020, just before the pandemic hit. So while some prices will or have already come back down from their peaks as supply chain disruptions and global crises recede - see gas prices for example - the overall price level will remain elevated and us mere mortals are left with hoping for wages to eventually catch up.
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