Spotlight: Deflation vs Disinflation

The rate of inflation is determined by the Office for National Statistics (ONS) through monthly assessments of prices for a ‘basket' of goods and services. This basket is comprised of over 700 items which are commonly purchased by consumers, ranging from everyday essentials like cereal and train tickets to larger items such as cars and holidays. The total cost of this basket provides a measure known as the Consumer Prices Index (CPI), reflecting the overall price level. To determine the inflation rate, the current CPI level is compared to its value from a year prior. The difference in the price level over the year is known as the rate of inflation. Inflation can have various effects on an economy and its stakeholders. Most notably, inflation erodes the purchasing power of money, meaning that consumers can buy fewer goods and services with the same amount of money over time. High inflation can negatively impact individuals' and households' budgets and living standards, which has been evident in the recent “cost of living crisis”.  Even though inflation has been falling over the last few months it does not mean that prices are actually falling, instead they are increasing at a slower rate. To start to ease cost of living pressures – at least for the average worker – total pay will need to start increasing by more than inflation. There has been evidence of this happening in the UK, for example, in October to December 2023, total pay rose by 1.6% more than CPI inflation, compared to a year earlier. As the predominant metric for assessing inflation, CPI is closely monitored by policymakers, financial markets, businesses, and consumers alike.

Deflation is the opposite of inflation, i.e. when the general price level of goods and services decreases. As prices decrease, individuals may delay spending in the hopes of purchasing an item at an even lower price in the future - the idea of why buy today, if I can buy it cheaper tomorrow, or next week, or next month etc. However, the benefits of lower prices are not universal, and economists often worry about the repercussions of declining prices on various sectors of the economy, particularly in financial contexts. Lower spending by individuals means less income for businesses, which can lead to higher unemployment rates as companies cut staff to make up for loss of income or profit, source Forbes Advisor. Deflation can adversely affect borrowers, who may find themselves obligated to repay debts with currency that now holds greater value than when initially borrowed, for example a £10,000 loan taken out prior to a period of deflation may now be “worth” £9,000 but the borrower has committed themselves to repaying £10,000.

Disinflation refers to a temporary slowdown in the rate of inflation, meaning that prices are still rising but at a slower pace than before. Unlike inflation and deflation, which indicate the direction of price movements, disinflation corresponds to the rate of change in the inflation rate itself. A moderate degree of disinflation is beneficial as it helps maintain economic stability by preventing the economy from becoming overheated. Governing bodies like the Bank of England and Federal Reserve, often use the term disinflation to describe periods of slowing inflation and will alter monetary policies as a means to counter periods of inflation. We have seen this happen across most developed economies over the last couple of years, as central banks have raised interest rates to cool economic activity and reduce the rate of inflation back towards central targets. This may mean that households experience some short-term pain, particularly those that have debts linked to short-term interest rates. Benefits of periods of disinflation are its ability to help maintain price stability and consumers’ purchasing power.

We often hear central banks referring to an inflation target of 2% - why is this the magic number for managing inflation? The banks’ main objective is to maintain price stability, so that individuals and businesses can plan their spending, investing and other financial decisions more effectively. As a result, it underpins stable economic growth. There is no exact science behind the 2% target, this is a balance struck between aiming to prevent excessive price increases and deflation.

The chart below is for illustrative purposes only and shows different periods of inflation, disinflation, and deflation within an economic cycle.


The Noise​

  • Perhaps the only thing more anticipated this week than Golf’s premiere event The Masters, US consumer prices rose more than expected in March as CPI jumped to 3.5% year-on-year, 0.1% above economist estimates. This is the third straight month that inflation has come in higher than expected, and is driving concerns that inflation is becoming entrenched and likely further delaying Federal Reserve interest rate cuts. Core CPI (Excluding food and energy costs) also rose 3.8% year-on-year, defying expectations of it reducing. Stock markets tumbled following the data release, as the US dollar strengthened vs a basket of global currencies, while Treasury yields rose. Paired with recent reports showing the labour market and economic activity have also been stronger than expected, investors no longer see much chance that the Fed will start easing interest rates anytime soon. Though the Federal Reserve has done a fine job managing the US economy this interest rate cycle, the cross-wind that is stubborn inflation is posing a threat to its currently “bogey-free” round.

  • The UK economy grew for a second straight month as GDP rose by 0.1% month-on-month in February, in line with the gain forecast by economists. January’s GDP figure was also revised upwards to show 0.3% of growth, from the 0.2% initially reported. The data adds to signs that the economy is gathering momentum after sliding into a shallow technical recession on the back nine of last year amidst high inflation and interest rates. Britain’s large service sector grew by 0.1% in monthly terms in February, as expected, while manufacturing output topped forecasts, rising 1.2% on the month. Construction sank 1.9%, as it was affected by wet weather.

  • The European Central Bank held interest rates at record high of 4% this week, though sent its clearest signal yet that it may tee-off rates cuts at their next meeting as euro zone inflation continues to fall. With inflation now close to the ECB’s 2% target and the economy now barely growing, the ECB’s Governing Council flagged a possible reduction in its accompanying statement for the first time. Though it continue to caution that a cut would remain data dependent, ECB President Christine Lagarde mentioned that a few Governing Council members are already sufficiently confident on inflation.

The Numbers

GBP Performance to 11/04/2024

Equity GBP Total Return

1 Week








MSCI Europe






MSCI Japan



MSCI Asia Pacific ex Japan



MSCI Emerging Market






Fixed Income GBP Total Return


UK Government



Global Aggregate GBP Hedged



Global Treasury GBP Hedged



Global IG GBP Hedged



Global High Yield GBP Hedged



Currency moves












Commodities GBP return









Source: Bloomberg, data as at 11/04/2024

The Nuance

Gold prices hit a new record high this week as central bank purchases amid continuing geopolitical tensions sustained the momentum seen through 2024. Indeed, global tensions add to gold’s appeal as insurance. The Middle East sees Israel and Iran at odds, Russian and Ukrainian forces continue to battle, and the US is embroiled in a contentious presidential race. In such times, gold offers a hedge, particularly if equity markets decline. Central banks, notably the People’s Bank of China and Reserve Bank of India, have been significant gold buyers, with purchases exceeding 1,000 tons in 2022 and 2023. Their long-term holding strategy effectively reduces available supply, driving prices up.

The market for gold is also in a state of change, with gold's traditional relationships to the US dollar, Treasury yields, and real rates evolving. Typically, a strong dollar and 10-year yields above 4.5% would negatively impact gold, but we’re not currently seeing that play out in markets. The divergence between gold prices and US Treasury prices could suggest that commodity and bond markets are starting to guard against inflation’s tail risks.


All investment views are presented for information only and are not a personal recommendation to buy or sell. Past performance is not a reliable indicator of future returns, investing involves risk and the value of investments, and the income from them, may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.

Any views expressed are based on information received from a variety of sources which we believe to be reliable, but are not guaranteed as to accuracy or completeness by atomos. Any expressions of opinion are subject to change without notice.

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