US inflation has fallen steadily in 1997, with core inflation at its lowest level since 1965. Many analysts see lower inflation in the year ahead amid weaker global growth, overcapacity in Asia, and falling commodity and import prices. Some analysts see the prospect of deflation for the first time since the Great Depression of the 1930s. In our view, the risk of deflation is more perception than reality. Some definitions Let's begin our discussion by defining three economic terms that refer to price movements.
Inflation refers to a persistent increase in the average price level and in the cost of living.
Disinflation refers to falling inflation. Prices still rise, but at a slower pace. Deflation is the opposite of inflation. It refers to a persistent decline in the general price level and in the cost of living. A decline in product prices is not necessarily bad for the economy if it reflects a rise in productivity growth.