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What is meant by disinflation? Is it the same as deflation?

Deflation describes a sustained fall in prices, in which the annual change in the Consumer Price Index (CPI) is negative in succeeding years. Over a four-year period in Canada during the depression of the 1930s, prices fell over 20 per cent. This was an extreme example of deflation.

Disinflation means that the rate of increase in average prices (as measured by CPI) slows down. The average price of a basket of consumer goods continues to rise, but the rate of that rise slows down.

If you think of the economy as a car driving down the road, then disinflation means the car continues to travel in the same direction but slows down; whereas deflation means it starts to travel in reverse.

How does this affect you as a consumer and investor? The Bank of Canada and the federal government act to avoid the harmful effects of both inflation and deflation by keeping a close eye on these trends, and will act through monetary policy to keep Canada’s economy stable.