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. 

BREAKING DOWN 'Reflation'

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. 

 

 

RELATED TERMS
  1. Trumpflation

    Trumpflation reflects the concern that inflation will rise during ...
  2. Inflation Trade

    An inflation trade is an investing scheme or trading method that ...
  3. Inflation

    Inflation is the rate at which prices for goods and services ...
  4. Inflation Targeting

    Inflation targeting is a central banking policy that revolves ...
  5. Monetary Policy

    Monetary policy is the actions of a central bank, currency board ...
  6. Inflation Protected

    Inflation protected refers to types of investments that provide ...
Related Articles
  1. 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.
  2. Insights

    The Consumer Price Index: A Friend To Investors

    As a measure of inflation, this index can help you make key financial decisions.
  3. Insights

    The Importance Of Inflation And GDP

    Learn the underlying theories behind these concepts and what they can mean for your portfolio.
  4. Personal Finance

    Fight Back Against Inflation

    Inflation is often a consequence of economic recovery. Here's how you can protect your financial portfolio.
  5. Insights

    How Monetary Policy Affects Your Investments

    Monetary policy changes can have a significant impact on every asset class. investors can position their portfolios to benefit from policy changes and boost returns by being aware of the nuances ...
  6. Investing

    Inflation and Deflation: Keep Your Portfolio Safe

    Inflation and deflation are opposite sides of the same coin. When both threaten, here's how to construct your diversified portfolio to keep it safe.
RELATED FAQS
  1. What causes inflation, and does anyone gain from it?

    In this article, we will examine the fundamental factors behind inflation, different types of inflation and who benefits ... Read Answer >>
  2. What's the Highest Inflation Rate in U.S. History?

    Learn about the periods with the highest inflation in U.S. history and find out how U.S. Federal Reserve policy measures ... Read Answer >>
  3. What is the relationship between inflation and interest rates?

    As interest rates are lowered, more people are able to borrow more money, causing the economy to grow and inflation to increase. ... Read Answer >>
  4. What is the average length of the boom and bust cycle in the U.S. economy?

    Learn more about the timing and impact of the expansion and contraction periods of the average business cycle in the U.S. ... Read Answer >>
Trading Center