DEFINITION of 'Reflation'

Reflation is a fiscal or monetary policy, designed to expand a country's output and curb the effects of deflation, which usually occurs after a period of economic uncertainty or a recession. As such, the term "reflation" is also used to describe the first phase of economic recovery after a period of contraction.

Reflation policies can include reducing taxes, changing the money supply and lowering interest rates. Furthermore, reflation is a long-term shift, often characterized by a prolonged reacceleration in economic prosperity that aims to reduce any excess capacity in the labor market. 


Reflation policy has been used by American governments, to try and restart failed business expansions since the early 1600s. Although almost every government tries in some form or another to avoid the collapse of an economy after a recent boom, none have ever succeeded in being able to avoid the contraction phase of the business cycle. Many academics believe government agitation only delays the recovery and worsens the effects.

In the wake of the Great Recession, the U.S. economy remained subdued and the Federal Reserve struggled to create inflation. Despite a number of reflationary monetary policy tools such as lower interest rates and increased money supply, inflation remained below the Fed's target. It wasn't until the election of President Donald Trump that the economy got a sniff of fiscal reflation. Trump pledged a trillion dollar infrastructure bill and far-reaching tax cuts in the hope to boost the economy to full capacity. His ambitious policies led to the term "Trump Reflation Trade."

The tax reform will be voted on towards the end of 2017. (Further reading: Trump's Tax Reform Plan)

Reflation v Inflation

It is important not to confuse reflation with inflation. Firstly, reflation is not bad in that it is a period of price increases when an economy is striving to achieve full employment and growth, whereas inflation is often considered bad as it is characterized by rising prices during a period of full capacity. G.D.H. Cole once said, "reflation may be defined as inflation deliberately undertaken to relieve a depression."

Additionally, prices rise gradually during a period of reflation and fast during a period of inflation. In essence, reflation can be described as controlled inflation. 



  1. Economic Recovery

    An economic recovery is a period of increasing business activity ...
  2. Inflation Protected

    The types of investments that provide protection against inflation ...
  3. Tight Monetary Policy

    A course of action undertaken by the Federal Reserve to constrict ...
  4. Overheated Economy

    An overheated economy is one that is expanding at an unsustainable ...
  5. Easy Money

    Easy money is when the Federal Reserve allows cash flow to build ...
  6. Expansion

    Expansion is the phase of the business cycle when the economy ...
Related Articles
  1. Investing

    Bonds Signal Warning on Trump Stimulus

    Bond prices rising in tandem with stocks are a warning that investors are losing faith in President Trump
  2. Insights

    Gundlach, Pimco Sour on Trump Reflation Trade

    Two savvy investors, who predicted last year's uptick in inflation, now say it may have peaked.
  3. Insights

    A Primer On Inflation

    Inflation has a negative connotation, but is it all bad or does it offer some tangible benefits?
  4. Investing

    A Key Trump-Rally Indicator Starts to Crack

    Investors anticipate that inflation and GDP growth won't rise nearly as fast under Trump as expected
  5. Insights

    Inflation's Impact on Stock Returns

    Learn about the impact inflation can have on stock returns. Find information on what types of stocks perform during times of high inflation or low inflation.
  6. Insights

    Is U.S. Inflation on the Horizon?

    Inflation, or the general price level of all goods and services in an economy, has remained subdued in the years following the Great Recession. Given recent developments, is the U.S. on the verge ...
  7. Investing

    Who Let the Air Out of the Financials?

    Financials have struggled so far in 2017.
  8. Financial Advisor

    How the Fed Fund Rate Hikes Affect the US Dollar

    Learn about the effects the federal funds rate on the U.S. dollar. Understand what happens when the Federal Reserve increases interest rates.
  9. Trading

    Coping With Inflation Risk

    Inflation is less dramatic than a crash, but it can be more devastating to your portfolio.
  1. What's the difference between monetary policy and fiscal policy?

    Discover the distinctions between these two tools designed to influence national economies. Read Answer >>
  2. What is inflation and how should it affect my investing?

    The rate of inflation is important as it represents the rate at which the real value of an investment is eroded and the loss ... Read Answer >>
Hot Definitions
  1. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  2. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  3. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
  4. Limit Order

    An order placed with a brokerage to buy or sell a set number of shares at a specified price or better.
  5. Current Ratio

    The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations.
  6. Return on Investment (ROI)

    Return on Investment (ROI) is a performance measure used to evaluate the efficiency of an investment or compare the efficiency ...
Trading Center