Introduction
Thiếu phát (translated as “deflation” in English) and lạm phát (inflation) are two essential economic factors that impact various aspects of the market economy. They have direct and indirect effects on government operations, businesses, individuals, domestic and international economic relations, as well as the global economy, depending on the economic position a country holds. While lạm phát and thiếu phát are closely related, they have distinct differences.
1. Understanding Thiếu phát
Many people are familiar with the term “lạm phát” (inflation), which refers to a general increase in prices. Some also know that “giảm phát” (deflation) is when prices decrease, resulting in negative inflation rates. However, fewer are familiar with the concept that lies between these two extremes, known as thiếu phát (deflationary pressure). Thiếu phát refers to a situation where the inflation rate is decreasing. It is like a person slowing down but still moving forward. In the case of thiếu phát, prices may still increase, but at a slower rate compared to before.
Thiếu phát occurs when the inflation rate decreases over a certain period of time. It should not be confused with a deflationary environment, where prices decrease in general. During a period of thiếu phát, prices continue to rise, but at a slower pace than in the previous period. The inflation rate remains positive, and households continue to experience a decline in purchasing power.
Thiếu phát can be both good and bad. It is considered good when it results from increased productivity and technological advancements, like what helped keep inflation low in the late 1990s. More commonly, deflation is brought about by the policies of the central bank. In such cases, deflation is intentional and welcomed. An exceptional case of deflation occurred in the early 1980s when inflation decreased from over 11% in early 1980 to an average of about 3.5% in 1985. Although high inflation was not a concern because the tight monetary policy aimed for modest production to reduce inflation and bring it closer to the central bank’s target.
The Difference between Thiếu phát and Giảm phát
Thiếu phát and giảm phát are different concepts. Giảm phát refers to a decrease in the general price level. On the other hand, thiếu phát means a slowing down of the inflation rate or deflationary pressure. Thus, a general increase in prices at a relatively slower pace or a decrease in the rate of increase is called thiếu phát, whereas giảm phát is the exact opposite of inflation. Both extremes, abnormal price increases or decreases, can be damaging to the economy and challenging to manage for policymakers.
Just like inflation, thiếu phát is measured using price indices. The most commonly referenced index is the Consumer Price Index (CPI). An alternative measure is the Producer Price Index or the deflator of the Gross Domestic Product (GDP).
The CPI measures the average change in the prices of goods and services consumed. It is one of the most closely monitored economic indicators by investors and central banks. Companies also monitor it, especially to adjust their cost components (such as wages) and selling prices.
Thiếu phát does not signal the beginning of an economic slowdown, and this condition is considered normal during a healthy economic period. On the other hand, when there is a threat that an economy might face deflation, the central bank will aggressively cut interest rates to stimulate demand and, therefore, increase prices. In such situations, deflation is seen as detrimental because consumers tend to delay their purchases, further decreasing prices.
The Consequences of Thiếu phát
Implementing a deflationary policy has short-term benefits for economic agents. For households, it is a way to slow down the erosion of their purchasing power as prices of goods and services increase at a slower rate.
For companies, deflation can lead to a halt in wage increases, affecting their price competitiveness. As an effective way to compensate for wage increases, companies raise prices to maintain their profitability. However, for import-export companies, this price increase may undermine their competitiveness. Consequently, they may decide to reduce their profit margins or risk losing market share by increasing their prices.
Deflation solves this dilemma. Therefore, it has short-term positive effects on all economic agents. In the long term, the consequences of deflation are much worse. In terms of efficiency, these higher interest rates to combat inflation slow down economic activity. Consumers consume less due to higher credit costs. Faced with reduced consumption, companies reduce investments, leading to an economic recession. In the long term, deflationary policies can lead to an economic recession and deflation.
2. Characteristics of Thiếu phát
Deflation is a temporary slowdown in the inflation rate and is used to describe cases when the inflation rate decreases slightly in the short term. Unlike inflation and deflation, which refer to the direction of prices, deflation refers to the rate of change in the inflation rate.
A significant deflation is necessary to prevent the economy from becoming overheated. The danger that deflation poses is when the inflation rate approaches zero, as it did in 2015, which raises concerns about deflation.
Although deflation and giảm phát are related, they are not synonymous. While deflation corresponds to a decrease in the general price level in the economy, thiếu phát refers to a slower rate of price increase or inflation. Thus, a general increase in prices at a relatively slower pace or a decrease in the rate of increase is called thiếu phát, while giảm phát is entirely opposite to inflation. Both extremes, abnormal price increases, as well as decreases, can be damaging to the economy and challenging for policymakers to manage.
Like inflation, thiếu phát is measured using price indices. The most commonly used index is the Consumer Price Index (CPI). Another alternative is the Producer Price Index or the GDP deflator.
The CPI measures the average change in the prices of goods and services consumed. It is one of the most closely monitored economic indicators by investors and central banks. Companies also monitor it, especially to adjust their cost components (such as wages) and selling prices.
3. Causes of Thiếu phát
Thiếu phát can result from various factors. Economic recessions or business cycle contractions can lead to deflation. It can also be caused by tightening monetary policy by a central bank. When this happens, the government may also start selling some of its securities and reduce the money supply. Specifically:
The central bank can implement a deflationary policy when inflation reaches excessively high levels. During an economic expansion, economic growth is often accompanied by increasing inflation. This inflation becomes self-sustaining. Effectively, when wages are determined (directly or indirectly) with inflation rates, higher prices lead to higher wages. To compensate for wage increases, companies raise prices, resulting in additional inflation.
To prevent the economy from becoming overheated, the central bank may decide to apply a deflationary policy. The aim is to limit access to credit and reduce the pace of money supply growth. To achieve this, the central bank has a very effective tool: interest rates. By increasing key rates, the initial inflation rate stabilizes before gradually decreasing (in theory). If the inflation rate decreases but remains positive, then we enter a deflationary period.
Another cause of deflationary pressure is when real GDP growth slows down due to weakened aggregate demand. Producers try to rationalize their production rates to match the demand. On average, producers are likely to increase their selling prices to a lesser extent than before.
In some cases, a slowdown in the inflation rate can also occur when an economic recession (contraction) begins. The price level is under downward pressure during this phase. It can only slow down the inflation rate rather than cause deflation. However, if the recession deepens, deflation is more likely to occur.
4. Examples of Thiếu phát
Thiếu phát in India
From 2012 to 2014, India’s most recent Consumer Price Index (CPI) was nearly in the double digits, averaging 10.1% in 2012-13 and 9.8% in 2013-14. However, there has been a significant decrease since then. In 2014-15, the average inflation rate decreased to 6%, a 400 basis point drop from two years earlier. And it has been lower by another 140 basis points until now in the 2015-16 period, averaging 4.6% from April to October.
Measured by the annualized quarter-on-quarter growth of the seasonally adjusted consumer price index, the inflation’s momentum has also decreased from 12.9% in the last quarter of 2013 to just 2.9% compared to the previous quarter, the seasonally adjusted annual rate (SAAR) from August to October 2015.
Conclusion
Understanding the concept of thiếu phát is crucial for comprehending the dynamics of the economy. While it is distinct from both lạm phát and giảm phát, it has its own set of characteristics, causes, and consequences. Thiếu phát can have both positive and negative impacts in the short term, but in the long run, it can lead to economic recession and deflation. By monitoring economic indicators such as the Consumer Price Index, policymakers can identify and respond to the risks associated with thiếu phát effectively.
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