Skip to content
DP
Central Banking & Monetary Policyadvanced

Disinflation and the Sacrifice Ratio

Disinflation is a fall in the inflation rate, not in the price level. Bringing inflation down is usually costly in lost output and higher unemployment, and the sacrifice ratio measures that cost as the cumulative percentage of a year’s output given up for each percentage point of inflation reduction. Greater central bank credibility lowers the sacrifice ratio, because expectations adjust faster.

Why it matters

If the public believes the central bank will see the fight through, wage and price setters lower their inflation expectations quickly and inflation falls with little extra unemployment. If they doubt the bank, expectations are sticky, and the only way to break inflation is a deeper, more painful slowdown.

Formulas

Sacrifice ratio
sacrifice ratio=cumulative output loss (% of GDP)fall in inflation (percentage points)\text{sacrifice ratio} = \frac{\text{cumulative output loss (\% of GDP)}}{\text{fall in inflation (percentage points)}}
The cumulative percentage of one year’s output forgone per 1 percentage point reduction in inflation. A higher ratio means a more costly disinflation.

Worked examples

Scenario

Under Paul Volcker, the Federal Reserve drove United States inflation down from around the mid teens to the low single digits in the early 1980s. What was the cost, and how does the sacrifice ratio frame it?

Solution

The disinflation came with a sharp recession and high unemployment, a clear output cost. The sacrifice ratio expresses that as the cumulative output lost per point of inflation brought down, and a credible commitment would have lowered it by speeding the adjustment of expectations.

Common mistakes

  • ✗Disinflation and deflation are the same thing. Disinflation is a slower rise in prices, while deflation is an outright fall in the price level.
  • ✗Lowering inflation is costless. It typically requires a period of lost output and higher unemployment, captured by the sacrifice ratio.
  • ✗Credibility has no effect on the cost of disinflation. A credible central bank speeds the adjustment of expectations, which lowers the sacrifice ratio.

Revision bullets

  • •Disinflation lowers the inflation rate, deflation lowers the price level
  • •The sacrifice ratio measures output lost per point of inflation reduction
  • •Credibility lowers the sacrifice ratio, as expectations adjust faster

Quick check

The sacrifice ratio measures

Disinflation differs from deflation in that disinflation is

Connected topics

Inflation TargetingTaylor RuleTime InconsistencyDeflation

Sources

  1. Mishkin (2018), Ch. 25
    Mishkin, F. S. The Economics of Money, Banking, and Financial Markets. 12th ed. Pearson, 2018. ISBN 978-1-292-26885-9.
    Disinflation, the output cost of reducing inflation, and the role of credibility, with the Volcker disinflation as the case.
How to cite this page
Dr. Phil's Quant Lab. (2026). Disinflation and the Sacrifice Ratio. Derivatives Atlas. https://phucnguyenvan.com/concept/mb-disinflation
← Back to the atlasSee in the network →