When disinflation takes place, it means that the rate of inflation has gone down. In more concrete terms, this means that the rate of increase in prices of commodities and services in a country has gone down. Disinflation is sometimes mistakenly used interchangeably with deflation. However, these two concepts are not synonymous. Deflation refers to an actual decrease in the price level, and not just a slowing down of the rate of increase. In some cases, though, especially when the inflation rate of the particular country is relatively low, an occurrence of disinflation can result in deflation.
Disinflation is said to be caused by a slowdown in the rate of increase of a country’s money supply. In some cases, it could also be caused by an economic recession. If, for example, businesses decide to refrain from increasing their prices in the interest of gaining more customers during a period of economic struggle, then disinflation is taking place. This is very bad for business, because businesses are forced to absorb costs and compromise profit just to get their products moving. In this case, disinflation is taken as a negative sign, but in cases of hyperinflation, such an occurrence may be a welcome development.
Disinflation is considered the opposite of reflation. The term reflation refers to action taken in order to stimulate the economy. This may be done by, for example, increasing money supply. A country may adopt certain economic policies to counter an occurrence of deflation, possibly by lowering taxes and manipulating interest rates. Although such actions constitute some form of government intervention, these are generally acceptable solutions.