Inflation, disinflation and deflation
What inflation is
- Inflation is a sustained increase in the general level of prices in an economy over a period of time.
- Sustained — not a one-off jump. A single price rise in one month is not inflation.
- General level of prices — the average across the whole economy, not one product.
- It is measured as a percentage change over a year.
- The standard itself defines the topic as "the issues associated with changes in the general level of prices".
- Because prices rise, each dollar buys less. Inflation is therefore also a fall in the purchasing power of money.
- Purchasing power is how much a fixed sum of money can actually buy.
What inflation is NOT
- Not the price of one good going up. Petrol rising while everything else is flat is a relative price change, not inflation.
- Not the cost of living being high. Inflation is about the rate of change, not the level.
- Not the same as prices falling more slowly. That is disinflation — the next section, and the single most examined distinction on this page.
The three words: inflation, disinflation, deflation
Inflation — the general price level is rising. The inflation rate is positive.
- Prices this year are higher than last year.
Disinflation — the general price level is still rising, but more slowly. The inflation rate is positive but falling.
- Prices are still going up. They are just going up less fast than before.
- An inflation rate falling from 7.2% to 4.7% is disinflation.
Deflation — the general price level is falling. The inflation rate is negative.
- Prices this year are lower than last year.
- This is rare, and it is a problem, not a bonus: if households expect prices to keep falling they delay spending, which cuts aggregate demand and can deepen a downturn.
| Year 1 rate | Year 2 rate | What is happening | Are prices rising? |
|---|---|---|---|
| 3% | 6% | Inflation rising | Yes, faster |
| 7% | 4% | Disinflation | Yes, but slower |
| 2% | −1% | Deflation | No — falling |
Why New Zealand cares about the number
- The Reserve Bank of New Zealand (RBNZ) is required to keep inflation low and stable — its Remit sets a target band of 1–3% annual inflation, with a focus on the 2% midpoint.
- Inflation is measured and published quarterly by Stats NZ in the Consumers Price Index (CPI).
- Low, stable inflation matters because it lets households and firms plan. Wildly changing inflation makes wage bargaining, saving and investing a guessing game.
Worked ExampleNaming the situation from data
An economy publishes these annual inflation rates.
| Year | Annual inflation rate |
|---|---|
| Year 1 | 6.8% |
| Year 2 | 4.1% |
| Year 3 | 1.2% |
| Year 4 | −0.4% |
Name what is happening between Year 1 and Year 3, and what is happening in Year 4. Explain each.
Step 1 — Check the sign of each rate
Years 1, 2 and 3 are all positive. Year 4 is negative.
Step 2 — Years 1 to 3
The rate is positive throughout, so the general price level is still rising in every one of those years. But the rate is falling — 6.8%, then 4.1%, then 1.2%.
Prices rising more slowly is disinflation.
Step 3 — Year 4
The rate is −0.4%, which is below zero. The general price level is now lower than it was a year earlier.
Prices falling is deflation.
Years 1–3: disinflation. Year 4: deflation.