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Brace yourselves, disinflation is coming
So a lot of people have been talking about disinflation lately. What does it even mean and why does it matter?
Inflation is how fast prices rise while “disinflation" means prices are still going up, but not as fast as they were before. It’s simply a slowdown of inflation, which ain't the same as "deflation," where prices actually drop.
Lets try to understand why disinflation is a good thing:
Interest Rates Might Go Down: Central banks, like the Federal Reserve in the U.S., often respond to high inflation by hiking up interest rates to cool things down. But if there's disinflation, they might decide to lower rates or keep them steady. Lower interest rates can make borrowing cheaper, which can spur investment and spending.
Debt Burden Eases (Kinda): If you've borrowed money, disinflation combined with nominal wage growth can make it relatively easier to repay your loans. Your paycheck might be going up while the cost of stuff isn't rising as fast.
Consumer Confidence Might Get a Boost: When prices aren’t rising as quickly, consumers might feel better about their purchasing power, leading to more spending.
Good News for Savers (Sometimes): If interest rates on savings accounts remain stable or rise while inflation slows, the real return on savings can improve. Your money in the bank might hold its value better.
The main index measuring inflation (called CPI) rose more than we thought, mostly because of high energy and gas prices. But when you take out the energy prices, the increase isn't as crazy.
A bunch of different areas (like housing) are also seeing slower price increases. If the biggest part of this inflation index slows down, the whole thing will too.
When you take a step back and look at the big picture, you’ll see a bunch of signs (like slowing rent increases, student loans, fewer job openings, and stuff happening in China) that indicate inflation's gonna keep cooling down in the coming months.
Inflation goes down (disinflation) = Assets go up
The more we continue to experience disinflation, the higher the chances of the economy doing well in the future. It’s not going to be a straight road but we’ll get there.