Inflation, Disinflation, Deflation

In Newspaperes or on News channels these three terms " Inflation, Disinflation and Deflation " are being used again and again. We keep on reading nowadays that Indian economy is heading toward Deflation or negative inflation, that means the inflation rate is approaching toward zero. Not only India but other countries are also facing the same. I read in the TOI yesterday that inflation rate at 32 year low of .44%, the lowest since 1977. Some economic pundits have prognosticate that India may face the deflation. The point is that=>This deflation is same that the country is looking at or afraid of ? Can deflation be bad as well good ?? Couple of quarter back india was struggling wid inflation and congress govt was crying like hell and now when elctions are less then a month aways its deflation whose taken there breath away.

Inflation:

Inflation is nothing but the "increase in the supply of money" which resulted in an "increase in price", but now the term inflation is redefined as " the substantial increase in prices".

When the supply of money is increased i.e if govt prints more money, people have more money to offer for goods(that means value of money falls) and if the supply of goods remains the same or does not increase accordingly to the supply of money then the price of goods rises. And this what happen under inflation.

** Money supply is the total amount of money existing in a economy at a point of time.

Disinflation And Deflation:

Disinflation means lower inflation. Prices are not increasing as quickly as they once did but they are still rising. A drop in inflation rate from 3% in one year to 2% in next is an example of disinflation. When this drop in inflation rate becomes less than zero, the economy is said to be under deflation if it exists for a sustainable period.

Generally people have trouble understanding the difference between these two terms. Disinflation and deflation are two very different terms. In disinflation price levl rises at a lower rate but in deflation price level does not increases at all but actually decreases. Generally a one time fall in the price level does not constitute deflation, instead one has to see falling prices for well over a year to conclude that economy suffers from inflation.

Deflation is caused by a shift in the supply and demand of goods. Its a myth among the people that deflation is always bad. Deflation can be good as well as bad depending upon the cause of that deflation. If the cause if the increasing supply of good the the deflation is good but if the cause is decreasing supply of money then it is bad for the economy.