Question

What effect will disinflation following a highly inflationary period have on the reported income of the firm?

Short answer

While disinflation, the price of goods or services increases at moderate rate, and the expensive inventory is charged against the softening retail price. It may lead to a decrease in the reported income of the company.

Step-by-step solution

Disinflation

Disinflation means the decrease in the inflation rate. It is a slowdown in the increasing rate of the price level of the goods and services.

Effect of disinflation

Disinflation following the inflationary period affects the net income of the company. During disinflation, the inventory purchased at high cost are sold at less price. It may affect the net income of the company adversely.