What is disinflation and how will it affect your investments?
A Look at Deflation vs. Disinflation
They sound similar, but they aren’t. Deflation is a drop in the overall prices in an economy, while disinflation is a temporary slowing down of inflation.
To be clear: deflation is the opposite of inflation. Disinflation, on the other hand, shows us how quickly inflation changes over time.
Deflation and disinflation mean different things for your investments. Photo by Guillaume de Germain on Unsplash
The term disinflation has been used a lot recently by the U.S. Federal Reserve to talk about the fact that inflation is slowing down. The Fed says that it’s a good thing.
This has captured the attention of financial markets because it suggests that the central bank’s war on high inflation is coming to an end. Powell himself seemed pretty optimistic that the economy can return to 2% inflation without a significant downturn or increase in unemployment. Good news if he’s right.
What does disinflation mean for your investments?
You will not be surprised to learn that the answer is: it depends.
In general, it is better for investments that are sensitive to interest rates. This is because it typically leads to lower interest rates, which make assets with fixed cash flows, like bonds, more valuable. Lower interest rates can also make it cheaper for companies to borrow money, which can benefit stocks in some sectors.
Disinflation can stimulate the economy by making borrowing easier. Photo by Pepi Stojanovski on Unsplash
On the other hand, disinflation isn’t as good for investments that are sensitive to economic growth, such as stocks in industries like manufacturing, construction, or transport. When it occurs, it can sometimes mean that there is weak consumer demand. This weakened demand can lead to reduced revenue and earnings for these companies.
Enjoy these insights? Stay ahead of the curve and sign up for our newsletter.