Reflation

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Reflation is used to describe a return of prices to a previous rate of inflation. One usage describes an act of stimulating the economy 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. [1] [2]

Contents

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. [3] [4] 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, 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 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. [5]

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. [6]

See also

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Hyperinflation in the Federal Republic of Yugoslavia Hyperinflation in Yugoslavia between March 1992 and January 1994

Between 1992 and 1994, the Federal Republic of Yugoslavia (FRY) experienced the second-longest period of hyperinflation in world economic history. This period spanned 22 months, from March 1992 to January 1994. Inflation peaked at a monthly rate of 313 million percent in January 1994. Daily inflation was 62%, with an inflation rate of 2.03% in 1 hour being higher than the annual inflation rate of many developed countries. The inflation rate in January 1994, converted to annual levels, reached 116,545,906,563,330 percent (116.546 trillion percent, or 1.16 × 1014 percent). During this period of hyperinflation in FR Yugoslavia, store prices were stated in conditional units – point, which was equal to the German mark. The conversion was made either in German marks or in dinars at the current "black market" exchange rate that often changed several times per day.

References

  1. ↑ "Report: Reflation Risk". Goldman Sachs. 7 April 2021. Retrieved 8 June 2021.
  2. ↑ "What is reflation? Definition and meaning". Market Business News. Retrieved 8 June 2021.
  3. ↑ "Position for reflation". UBS . Retrieved 8 June 2021.
  4. ↑ Parkes, Graham (2021-02-23). "What is a 'reflation trade' and why is it important to investing?". The Sydney Morning Herald . Retrieved 8 June 2021.
  5. ↑ "Global Reflation Continues" (PDF). Morgan Stanley. March 2017. Retrieved 8 June 2021.
  6. ↑ Baker, Jonathan (14 January 2021). "The Reflation Trade: What Is It?". BDF LLC (BDF). Retrieved 8 June 2021.
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