Are They The Same? Low inflation vs. Deflation

Not to the question. This always causes an interpretation problem to students & laymen on the street.

What we meant by lower inflation say 6% (September 08) vs. 5.5% (October 08), is prices of goods & services are increasing in October BUT at a SLOWER rate. Another thing, never ever develop the thinking that inflation has fallen by 0.5% (6%-5.5%). That is very wrong!

Deflation is a general fall in price level of the economy. Here it means general prices of all goods & services used to construct the CPI index are really FALLING. An illustration will help the understanding:

Say, CPI in 2008 = 179.9 & CPI in 2009 = 177.1. Therefore,

Rate of inflation = (177.1-179.9) / 179.9 x 100 = -1.6%

Here -1.6% means falling price level. Goods & services have fallen by 1.6% in general