Page "Disinflation" Paragraph 3

There is widespread consensus among economists that inflation is caused by increases in the supply of money available for use in a nation's economy.

Inflation can also occur when the economy ' overheats ' because of excess aggregate demand ( this is called demand-pull inflation ).

The causes of disinflation are the opposite, either a decrease in the growth rate of the money supply, or a business cycle contraction ( recession ). If the central bank of a country enacts tighter monetary policy, that is to say, the government start selling its securities, this reduces the supply of money in an economy. This contraction of the monetary policy is known as quantitative tightening technique.

When the government sell its securities in the market, the supply of money reduces and money becomes more upscale and the demand for money remains constant. During a recession, competition among businesses for customers becomes more intense, and so retailers are no longer able to pass on higher prices to their customers.

The main reason being when the central bank adopts contractionary monetary policy its becomes expensive to annex money which leads to the fall in the demand for goods and services in the economy.

Even though the demand for commodities fall the supply of the commodities still remains unaltered. Thus the prices would fall over a period of time leading to disinflation.

In contrast, deflation occurs when prices are actually dropping.