Inflation, deflation, hyperinflation, reflation, stagflation… There is a definitely an inflation of terms related to inflation. It might be confusing, but our aim is to shed light on another similar term: disinflation, with the hope of bringing in some clarity.
Disinflation means a decrease in the rate of inflation. So it still refers to a positive inflation rate, but this rate is getting lower over time. It should not be, thus, confused with deflation, which means negative inflation rates, or price decreases. When we have disinflation, prices still go up, but at a slower pace. Hence, we can say that disinflation is a temporary slowing of the pace of price inflation.
Probably the most famous disinflation in the modern U.S. history is the one that happened when Paul Volcker was the Fed Chair. He took the position when inflation in America was in double-digits. But he manage to reduce the CPI annual rate from 14.6 percent in March 1980 to 1.2 percent in December 1986, as one can see in the chart below.
Disinflation and Gold
What is the link between disinflation and gold? If you take another look at the chart below, you will see that gold does not take to disinflation.
Chart 1: Gold prices and CPI annual rates from January 1977 to December 1989.
Why is that? Should not be gold an inflation hedge? After all, disinflation is still positive inflation. Yes, and while gold is a hedge against inflation, it tends to shine only when inflation is high and accelerating. Investors are always forward-looking, so if inflation is high but decreasing, they will not lose confidence in a fiat currency and they will not turn into gold in droves. This is why disinflation is negative for the gold prices.