Deflation v disinflation   Why inflation is bad   Goal of low inflation   Why the RBA targets 2-3%   Measurement of inflation    Headline v underlying   Inflationary expectations

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 Course notes quick navigation

1 Introductory concepts 2  Market mechanism  3 Elasticities  4 Market structures 5  Market failures  6  Macro economic activity/eco growth  7 Inflation 8  Employment & unemployment  9  External Stability  10  Income distribution 11.Factors affecting economy  12  Fiscal/Budgetary policy  13  Monetary Policy   14 Aggregate Supply Policies  15 The Policy Mix

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 Deflation versus disinflation

Deflation is the opposite of inflation.  It refers to a sustained decrease in the general or average price level.  This means that prices on average are falling, but it occurs relatively infrequently in Australia..  Deflation is distinct from disinflation, which refers to fall in the rate of inflation.  For example,  if Australia’s rate of inflation falls from 4% in year 1 to below 2% in year 2, prices on average are still rising over the period (i.e. inflation still occurs), it’s just that prices are not rising as rapidly in year 2 when compared to year 1.

It is important to be careful with the difference between deflation and disinflation. A common mistake students make is to assume that because the rate of inflation is falling, prices are falling, and this is clearly wrong. If there is any inflation at all, prices are still rising on average, because inflation is, by definition, a sustained increase in prices over time.

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