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We’ve all heard of inflation, whether that be in a high school history class or through a news program of the past few years. But what about deflation and disinflation? At first glance, they may sound like improvements over inflation. However, both terms carry their own weight and, in some respects, consequences.

Understanding Inflation

Inflation is “a general increase in prices and fall in the purchasing value of money.” Your money will still hold value, but you’ll likely purchase less of the goods or services you need as the rate of inflation increases. As a result of inflation, the overall cost of living, from buying groceries to filling your car with gasoline, becomes more difficult.

There have been several periods throughout history where inflation has been felt. World War I was a period of significant inflation, as the goods that many people needed were required by the military to aid in the war effort. More recently, the COVID-19 pandemic saw inflation rates increase as there was a materials shortage against an increased demand. During these periods, certain goods were harder to come by, widening the rift between supply and demand.

A common location where inflation may be most felt is at the grocery store. There may be one month where your entire order costs you $150. When you go back the following month and purchase the same items, the total may have increased to $160. You still bought all of the same, necessary items, but you needed to pay an additional $10 this month as opposed to the previous month. This could signal inflation.

What is Deflation?

In economics, deflation is a “reduction of the general level of prices in an economy.” Deflation is commonly seen as the opposite of inflation. Your money holds a higher purchasing value, so you would be able to buy more of the goods you need for the same amount of money.

On a surface level, that sounds like a great thing! However, deflation carries severe drawbacks, which makes it even more harmful than inflation. Deflation often signifies hard times and recessions. Layoffs at companies may be implemented because of a drop in profits, and interest rates often increase.

The Great Depression was a period of severe deflation in United States history. This period of time saw a perfect storm of deflation’s outcomes, with increasing unemployment rates leading to a reduced demand for goods and lack of consumer spending. Banks also felt this strain – though the need for money was high, it was inaccessible for most people at the time.

Sticking with the grocery analogy, you may notice that your grocery order, which once cost $150, now costs $145. While this may be helpful to your own pocket, it could carry those unfortunate consequences below the consumer surface. That grocery store may not need as many workers stocking shelves if their supply has remained high relative to a lack of demand. Similarly, the factories producing any of these groceries would also feel the lack of demand.

What is Disinflation?

As the name would suggest, disinflation is still inflation, but at a lessening rate. Prices are still rising, but at a slower pace than they would under a period of inflation. Disinflation is commonly seen as a positive alternative to deflation.

While it still may not sound ideal, disinflation is favorable to inflation and especially so to deflation. While signaling a potential break from much higher prices to come and the monetary strain of inflation, disinflation also holds off the harmful effects that deflation offers. As opposed to deflation’s flattening of prices and lack of consumer demand, disinflation doesn’t lower prices and typically represents general economic health.

In the years since the onset of the COVID-19 pandemic, the United States has experienced a period of disinflation. Prices are still rising and you may be shelling out a tad more money than normal for certain items, but these increases aren’t as tangible as they would be during a period of inflation.

Against inflation and deflation, disinflation may be a bit harder to see or feel in a significant way. A can of tomato sauce may cost you $3.45 in May, which then becomes $3.70 in June and $3.95 in July. While not a massive increase, the cost is still rising by a quarter each month. This is different from inflation, which may have the cost for a can of tomato sauce increasing by fifty cents month-to-month.

Using the Consumer Price Index

Besides recognizing if the price for certain groceries or other goods has increased, there is a measurement that is used to identify the economic period we’re currently facing. The Consumer Price Index (CPI), produced by the Bureau of Labor Statistics (BLS), is what the United States uses to measure rates of inflation. Most charts representing CPI data will be on a month-to-month basis.

The BLS gathers CPI data by looking at the average prices of various consumer goods and services, from food and gasoline to streaming subscriptions, and how the price changes for these items affect consumers. Items are weighted – the cost of groceries or electricity would bear more weight on determining this average than cable television would. The current CPI as of May 2024 was 314.07, an increase from 313.55 in April 2024.

In terms of a percentage increase, the current inflation rate in Philadelphia and the surrounding areas is 3.6%, using CPI data. This marks a marginal decrease from April 2024, which maintained a 4.1% inflation rate for the local area.

Inflation and Its Effect on Rates

Just like groceries and other goods and services, inflation generally impacts rates as well. Certificate rates and IRA rates typically see these effects, where the dividend rate may fail to combat the inflation rate of the current moment.

At American Heritage Credit Union, we strive to supply our members with competitive rates and dividends to help alleviate the challenges inflation brings forth. Be sure to visit our Rates Page to review the current rates for our various product offerings.

How to Prepare for Inflation

The best way to be prepared for inflation is to stick to your budget, and consider eliminating any luxury purchases, such as entertainment or dining out. While it may be difficult to cut back on some of these comforts, the extra money you do have month-to-month will likely be needed to help combat inflation’s rising prices.

You should also look to bolster your savings. With American Heritage’s High-Yield Savings Account and other types of savings accounts, you can put money aside to help combat inflation!

Increasing your monthly income can also help to prepare for inflation. While that’s not always immediately possible, a part-time job could help to bring in some extra money to cover bills or pay for groceries. Part-time jobs are also a great opportunity to network, save extra money, and further develop a new skill.

Recognizing Inflation, Deflation, and Disinflation

By now, you should have a better understanding of inflation and its distant relatives, deflation and disinflation. While all carry their own unique characteristics, it’s crucial to your overall financial success to have recognition for each, and what it may mean for your wallet.