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Disinflation vs. Deflation

June 24, 2022

Inflation, disinflation, deflation: A clear understanding of these terms and what they mean for pricing will help you plan more effectively this decade. Check out our latest TrendsTalk episode with ITR Economist and Speaker Lauren Saidel-Baker to learn more.

 

 

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The below transcript is a literal translation of the podcast audio that has been machine generated by Rev.

 

Hi, I'm Lauren Saidel-Baker, and welcome to this episode of ITR Economics TrendsTalk from the road. When we ITR speakers travel, we field a lot of varied questions. But I'm getting one in particular lately. And that has to do with inflation. As you probably know, if you've been following our TrendsTalks, we expect disinflation to take hold later this year, but critically, not deflation.

I really want to unpack what we mean with that expectation. Inflation is incredibly high right now. That's no surprise to anyone. We're at something like 30 or 40-year highs in various different measures of the inflation rate. And so we are certainly feeling it, both as consumers, as we look at the CPI or Consumer Price Index, as producers, as businesses. We all feel these higher price levels. And I think we have a little bit of collective whiplash as we look at today's inflation rates, just because the past decade, the post Great Recession period, was one of historically low inflation levels. So it was a very sudden rise to these extremely high levels, but it was exacerbated in our minds and understandings because we came from such a low baseline.

So looking forward, I think it's critical to note where we are in the economic cycle. Our industrial economy recently transitioned to a slowing growth trend, but critically, still a positive growth trend. However, most of the factors that brought us to this place in terms of inflation and in these inflationary pressures, those trends have changed. Most of the worst pressures that brought inflation so high, those are now behind us. As we look at things like commodity prices, they are still rising, but at a much slower growth rate than we'd seen, especially last year. A lot of those capacity issues, the labor constraints that led to higher wage inflation, a lot of our supply chain and logistics issues, these things that brought us to this point, they aren't now repeating.

Critically, as we look at the pandemic effects on things like liquidity, on money supply, on just the sheer amount of support from federal governments, all of those trends, they're now in the rearview mirror. So the worst drivers are largely behind us. I want you to keep in mind that inflation is a rate. We are not looking at price levels. We're looking at the growth rate in those price levels. So I do expect inflation will stay positive. That's not what we're arguing here. We're not arguing for deflation. But we are suggesting that disinflation should take hold.

Now I, again, want to go back to that whiplash comment. We're coming from a very, very low level of inflation for roughly a decade. That sticks in our minds in our short-term memory. So don't expect to just go back to where we had been. Looking ahead, we will find that new normal, and we will find a roughly higher baseline, something more historically normal.

I don't think that should scare us, though. Throw away the old playbook. Look back a little bit further to those historical norms of, let's say, the nineties. Most businesses should be able to remember, have someone who does remember those times. But I don't want to look back too far. I'm not looking to the seventies and eighties and those runaway inflation rates when we all had, what, 16, 19% mortgages and we were happy to get those rates at the time. We aren't headed back there. Look for normalcy and stay with us at ITR as we get there.

Thanks so much for joining me today. For ITR Economics TrendsTalk, I'm Lauren Saidel-Baker. Let's talk more soon.

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Since 1948, we have provided business leaders with economic information, insight, analysis, and strategy. ITR Economics is the oldest privately held, continuously operating economic research and consulting firm in the US. With a knowledge base that spans six decades, we have an uncommon understanding of long-term economic trends as well as best practices ahead of changing market conditions. Our reputation is built on accurate, independent, and objective analysis.