Inflation and recession have almost become the order of the day and topics of discussion in most global economic market news in recent times. Despite this very few are aware of what it is about or how it affects them as an individual, business owner, freelancer, or employer.
In simple terms, these 2 terms can be explained as follows: when the economy weakens, there is a recession. And when the price of goods in the market increases, it is called inflation. There is a distinction between these two terms, even though they can coexist.
Everything you need to know about inflation and recession such as what they are, what causes them, the difference between recession and inflation, and most importantly how they affect the economy can be found in this article.
What is Inflation
One of the most commonly used expressions in economic talks is inflation, yet the idea is often misunderstood. In the field of economics, inflation is the broad term for a rise in the cost of goods and services across an economy.
Each unit of currency can purchase fewer products and services as the overall price level rises, hence inflation is characterised by a decline in the buying power of money.
Different individuals or economic actors are impacted by inflation in different ways. Every society may be divided into two broad economic groups: those with stable incomes and those with variable incomes.
The first group suffers during inflation, whereas the second group benefits.
The reason for this is that prices for various goods and services fluctuate differently. Most prices grow during an inflationary period, although individual price increases vary in speed. Therefore, those with stable incomes are more affected, especially because changes in price do not mean a change in income.
What is Recession
A recession, as defined by the National Bureau of Economic Research (NBER), is a long period of significant economic activity decline manifested in industrial production, employment, real income, and wholesale-retail trade.
Economic activity declines significantly during recessions, which can last for several months or even years. Recessions are thought of as a necessary part of the economic cycle or the periodic rhythm of expansion and contraction in a nation’s economy.
When one sector of the economy collapses, it might start a domino effect that spreads to other sectors, which can lead to a recession. Some of the most important signs of a recession include:
- wholesale and retail sales
- The yield curve for bonds
- Pay and revenue
- Interest rates and price increases
What is the difference between inflation and recession?
The primary distinction between inflation and recession is that a recession is characterized by a sharp drop in corporate activity, whereas inflation is characterized by an increase in product prices. Both inflation and a recession lower money’s buying power and lower employee pay.
The Consumer Price Index (CPI) and the Wholesale Price Index (WPI) are used to measure it (CPI). However, unfriendly economic results are the root of both. Let’s now look at a comparative table to grasp the similarities and differences between inflation and recession, by WallStreetMojo.
|Definition||Price increases for products and services are a sign of inflation||It is a period of economic business stagnation that culminates in a financial catastrophe for the whole economy.|
|Causes||Increased public expenditure, indirect taxation, population expansion, stockpiling, and global debt.||Trade conflicts, budgetary restraints, an increase in interest rates, a decline in asset prices, and a change in consumer behaviour.|
|Types||Demand-pull, cost-push, and inherent inflation are the three basic forms of inflation.||Its subclasses include supply-side shock recession, boom and bust recession, and balance sheet recession.|
|Effects||Products and services cost more money. The buying power of money decreases as a result.||Less employment is available since several businesses have shut down. As a result, there is a wave of economic downturn and rising unemployment.|
Can inflation and recession co-exist
Most people usually question if inflation and recession can co-exist. here is an answer by Forbes Advisor; High inflation rates can signal the start of a recession, especially because most businesses will reduce production and raise prices in response to rising expenses.
And there is a chance that the move might contribute to the start of a recession if the Federal Reserve raises rates once more in an effort to rein in growing inflation. When they both co-exist it is called STAGFLATION.
In terms of economics, stagflation, sometimes known as recession-inflation, is a state in which unemployment is consistently high, the economy is growing slowly, and the inflation rate is high or rising.