In the course of the week, I’ve heard the low inflation rate described several times as a “deflation”. Mark Carney, the Governor of the Bank of England has commented:
“The UK is not experiencing ‘deflation’: excluding food and energy, 68% of the underlying categories of the CPI are showing positive inflation, close to the 1997-2007 average of 67%”.
Robert Peston, the BBC’s Economics Editor, similarly reports:
“if stagnation in prices were to go on for longer, if it were to turn into fully fledged deflation, that would be worrying.”
This is a muddle, from people who really ought to know better. Inflation is a process of rising prices. Deflation is or was once, according to my old copy of the Penguin Dictionary of Economics, “a reduction in the level of economic activity in an economy”. What happens in money markets matters, but deflation is something else entirely – and there’s no intrinsic reason why we might not have inflation and deflation, together at the same time.
The opposite of deflation is not inflation, but reflation. What, then, is the opposite of inflation? This is where confusion sets in. Economists used to use the word “disinflation” to describe falling prices. The Penguin Dictonary is pretty clear on this one: disinflation is defined as “the reduction or elimination of inflation. Should not be confused with deflation.” That definition of disinflation looks a lot like what’s happening now. Unfortunately, bankers and finance people got hold of the word and started to use it to mean a slowing pace of inflation, which is, I regret to say, yet more inflation. So there’s now no effective way of describing a situation that used to be thought of as commonplace.