Reflation is used to describe a return of prices to a previous rate of inflation. One usage describes an act of
stimulating the
economy
An economy is an area of the Production (economics), production, Distribution (economics), distribution and trade, as well as Consumption (economics), consumption of Goods (economics), goods and Service (economics), services. In general, it is ...
by increasing the
money supply or by reducing
taxes, seeking to bring the economy (specifically the price level) back ''up'' to the long-term trend, following a dip in the
business cycle. It is the opposite of
disinflation, which seeks to return the economy back ''down'' to the long-term trend.
Overview
In this perspective, reflation, is contrasted with inflation (narrowly speaking) ''above'' the some long-term trend line, while reflation is a recovery of the price level when it has fallen ''below'' the trend line.
For example, if inflation had been running at a 3% rate, but for one year it falls to 0%, the following year would need 6% inflation (actually 6.09% due to compounding) to catch back up to the long-term trend. This higher than normal inflation is considered reflation, since it is a return to trend, not exceeding the long-term trend.
This distinction is predicated on a theory that
economic growth
In economics, economic growth is an increase in the quantity and quality of the economic goods and Service (economics), services that a society Production (economics), produces. It can be measured as the increase in the inflation-adjusted Outp ...
, where there is long-term growth in the economy and price level, is both sustainable and desirable. Just as
disinflation is considered an acceptable antidote to high inflation, reflation is considered to be an antidote to
deflation (which, unlike inflation, is considered bad regardless of its magnitude).
Reflation has also found usage in forensic economics to describe a return to monopolistic (exorbitant) price paths following correction. Inflation can be regarded as expansion of prices beyond previous levels, while reflation can describe return to a previous pricing strategy.
Policy
The term "reflation" can also refer to an
economic policy
''Economic Policy'' is a quarterly peer-reviewed academic journal published by Oxford University Press, Oxford Academic on behalf of the Centre for Economic Policy Research, the Center for Economic Studies (University of Munich), and the Paris Scho ...
whereby a government uses fiscal or monetary stimulus in order to expand a country's output. This can possibly be achieved by methods that include reducing tax, changing the money supply, or even adjusting
interest rates.
Originally, it was used to describe a recovery of price to a previous desirable level after a fall caused by a recession. Today it also (in addition to the above) describes the first phase in the recovery of an economy which is beginning to experience increasing prices at the end of a slump. With rising prices, employment, output and income also increase till the economy reaches the level of
full employment.
See also
*
Economic bubble
An economy is an area of the Production (economics), production, Distribution (economics), distribution and trade, as well as Consumption (economics), consumption of Goods (economics), goods and Service (economics), services. In general, it is ...
*
Inflationism
References
External links
*
Inflation
Economic bubbles
Macroeconomic policy
{{macroeconomics-stub