1) The disconnect.me extension appears to mainly disable tracking cookies and force the use of HTTPS (encrypted connection to a website) where possible. This is dependant on each individual website, but the data is encrypted from your computer until it hits the web server at the other end.
2) WiFi encryption stops people from sitting outside your house and watching the traffic/joining your wireless network. It encrypts your data between your computer and your wireless access point.
So 2 is great against local threats, and stops unwanted people from joining your network.
Whereas 1 is more wide reaching as it attempts to stop people from reading your data as it travels over the internet to its destination and back. However it's worth noting that decent websites will do this anyway when you are sending sensitive data such as payment details, and rubbish websites may not have any encryption to enable at all anyway (the extension would do nothing).