Inflation, deflation and disinflation: what are they and how can they affect foreign trade?

“Inflation stands at 0.24% in August, highest rate for the month since 2016, IBGE points out”


“Brazil records deflation for second month in a row due to falling demand”


“Interest rates have firm drop, with disinflation horizon”


These were headlines reported by Brazilian media outlets between April and June 2020. The key aspect to understanding this news is to be able to differentiate three apparently similar concepts, used to map the economic activity of a country, but which refer to very different realities: inflation, deflation, and disinflation.


Despite being very present in the media, these three words can offer confusion – firstly because they are so similar in terms of writing, and secondly because they are concepts specific to economic studies that are often not explained to the general public. On the other hand, knowing this difference is extremely important to understand the impacts that these different realities have on a country’s economic activity, especially in the area of foreign trade.


That is precisely our mission in this post. First we help you distinguish between inflation, deflation and disinflation, and then we show how these concepts, especially that of inflation, influence trade with other countries. Come with us!



Broad Consumer Price Index (IPCA)

Before dealing with the differentiation between the concepts of inflation, deflation, and disinflation, it is important to understand what the Broad Consumer Price Index (IPCA), prepared by the National System of Consumer Price Indices (SNIPC), is.


It is an indicator that calculates the price variation of the basket of goods and services consumed by Brazilian families that earn between 1 and 40 minimum wages. This basket consists of the set of the main products consumed by these households and is always subject to change, since there are always new goods in the economy. Likewise, there are goods that are no longer traded or no longer relevant.


The IPCA is calculated monthly and takes into account the variation in the price of these goods and services. From this we have the calculation of inflation, deflation and disinflation rates.


Now let’s get down to what each of these concepts means.



What is inflation?

Inflation is the generalized increase in prices calculated by the IPCA.


It is caused, most of the time, by an increase in the level of activity in the economy. Basically, people start buying more, i.e. demand increases, and companies have to produce more, increasing supply. This is an example of the practical application of the law of supply and demand.


When there are more products than are interested in buying them, prices tend to fall. On the other hand, if a product is in short supply or if demand increases, its price tends to increase. Ideally, this movement of prices up and down would eventually cause the market to reach an equilibrium point, where supply equals demand.


One factor that can lead to an increase in prices is an increase in public spending, which in turn leads the government to increase taxes and thereby, The prices of products in general also increase. Furthermore, inflation is said to be inertial when people anticipate more inflation in the future and increase their spending in the present. There are also other factors, such as monopolies, sudden increases in production costs, and low production levels due to various factors.


Inflation has numerous consequences for a country’s economy, from the population’s loss of purchasing power to rising interest rates.



What is deflation?

Deflation occurs when overall product prices fall. It is, therefore, the opposite of inflation.


Why is this so? The reasons are varied, but basically deflation is associated with a fall in demand and the resulting abundance of products. In other words, due to a combination of factors or due to a single cause, people consume less. In a vicious circle, knowing that prices are falling, people postpone their purchases even more, hoping to reach a more advantageous value.


If it happens in isolation, deflation can be a mere correction of prices – in response to a too high increase in the past. However, when it is prolonged, the economy contracts, which can lead to increased unemployment and business losses. The more lasting consequences could compromise the country’s ability to invest and recover.


One of the worst deflationary crises in history took place in the United States, after the New York stock market crash of 1929. In Brazil, in the 1930s, prices fell so low that the Getúlio Vargas government had to intervene, buying and burning millions of sacks of coffee, the main product exported by Brazil at the time. This has reduced supply and forced an increase in prices.


What is disinflation?

Unlike deflation, disinflation occurs when we have the combination of two scenarios (1) inflation decreases, but (2) this increase in prices occurs at a slow pace. In this case, we have a rise in prices by a smaller percentage than was presented or expected for a given period.


Disinflation can be one-off or chronic – this has been the case in Japan for many years. Although it is often a more advantageous scenario than deflation, since the latter can be associated with a period of recession in the economy, deflation can signal that something is not going well, especially if it is persistent.



How is foreign trade affected?

In practice, in an inflation scenario, a country’s money depreciates, that is, you buy less for the same amount of money. This is associated with a devaluation of the currency mainly against the dollar, the main currency on the foreign exchange market and the basis for transactions in the global economy.


As a result, import costs increase. Thus, the presence of foreign products circulating in the national market is reduced. On the other hand, exports are gaining steam. The devalued Real is a synonym that the Brazilian product will be offered in the domestic market with a lower price and, therefore, more competitive to compete with the others. With more exports, the influx of dollars into Brazil increases and the trade balance deficit tends to decrease.


According to data from the September 2020 IPCA-15 (National Wide Consumer Price Index – 15), which measures the official inflation forecast, Brazil registered a price increase of 0.45% in September this year. This rate is higher than the 0.23% of August this year and the 0.09% of September last year. This is also the highest result for 1 September since 2012 (0.48%).


This whole scenario is encouraging for several productive sectors that wish to export. If this is the case for you and your company, you can count on Open Market‘s expertise. For more than 20 years in the market, we offer intelligent solutions in foreign trade management. With services in the import and export area, we guarantee total control of these processes. Want to know more? Contact us right now and we will be happy to answer your questions!


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Until the next post!



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