The myth
When inflation begins to slow down after a long period of rising, it often brings a sense of relief. After struggling with high costs, many people expect that lower inflation means the price of groceries, rent, and gas will finally decrease.
The reality
The inflation rate is essentially the speed at which prices are climbing. Inflation itself doesn’t drive prices higher. It is simply a measure of how quickly the average price level is changing.
To track these changes, inflation reports use the Consumer Price Index (CPI), which monitors a “basket” of common goods and services consumers buy.
Because this is an average, it is important to remember that some prices may climb faster than others.
When news reports say inflation has fallen, prices still generally went up, just at a slower pace than the previous period. Another term for slowing inflation is disinflation (for example, dropping from a 4% inflation rate to 2%).
The term for falling costs is deflation. It occurs when the change in price levels becomes negative (for example, moving from 1% to -1%).
While lower prices may sound like a win for consumers, deflation can be a danger sign for the economy. It often happens due to low demand or an oversupply of goods.
When people expect prices to drop even further, they may delay their spending. This drop in consumer demand can force businesses to produce less, leading to lower profits and cost-cutting measures like job cuts.
This is why central banks work hard to avoid both deflation and high inflation by controlling interest rates.
Even though you are still paying more during periods of disinflation, it offers relief because prices are more stable and easier to manage.
Additionally, when inflation is low, central banks like the Bangko Sentral ng Pilipinas (BSP) have the flexibility to lower interest rates.
This makes borrowing cheaper for individuals and businesses, which encourages spending and investment, helping the overall economy grow.
Verdict: False
Lower inflation means prices are rising more slowly, not that they are falling. Prices only truly go down during deflation, when the change in costs becomes negative.
Understanding this distinction helps you read the news more clearly, set realistic financial expectations, and plan how to effectively save, spend, and invest.
