Inflation Vs Recession : Definitions, differences, and relationship

Inflation Vs Recession: Inflation is the increase in the general price level of goods and services. Recession means a period of negative or very weak economic growth.

Both inflation and recession are phases of the business cycle. The business cycle goes through four major phases: expansion, peak, contraction, and trough. Usually, the recession occurs in the contraction phase and inflation occurs in the expansion phase of the business cycle.

business cycle
Business Cycle

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Firstly, discuss what is inflation and what is recession.

What Is Inflation?

Inflation can be defined as the increase in the general price level of goods and services. Inflation occurs as a result of different social, economic, and political factors. There are three types of inflation. They are demand-pull inflation, cost-push inflation, and built-in inflation.

Three types of inflation

1. Demand-pull inflation

Demand-pull inflation describes that increasing demand for goods and services increases the price level.

2. Cost-push inflation

As a result of the cost of materials and the cost of wages increasing, cost-push inflation occurs. Cost-push inflation often kicks in when demand-pull inflation is going strong.

3. Built-in inflation

As employees expect an increase in income when the cost of goods and services rises in order to maintain their standard of living, this is known as built-in inflation.

Inflation is not a negative economic scenario at all times. Usually, inflation occurs when the economy is expanding. Federal Reserve Bank target to remain at 2 percent of inflation. But higher inflation is not beneficial for any economy. It decreases the purchasing power of money and worsens the living standards of the people. This can be explained using following picture.

Inflation reduces purchasing power
Inflation reduces purchasing power

What Is a Recession?

Recession means a period of negative or very weak economic growth.

It is very important to define recession technically. When we technically define the recession, “it is the period of minimum two consecutive quarters of negative economic growth rate”. Here usually economic growth is determined by the growth of the Gross Domestic Product (GDP).

But some well-reputed organizations have defined the recession differently. As an example, according to the National Bureau of Economic Research (NBER), recession means a period of minimum of more than a few consecutive months with significant economic decline.

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When an economy with a recession, its aggregate production is declined or increased very slowly, and unemployment is increased significantly. Because the output level of the business organizations is decreased and then they have to lay off employees. As result of losing employment, people reduce their private consumption expenditures such as buying a car, or house.

Is the inflation or recession worse?

Is the inflation or recession worse?

Recessions cause significantly more economic harm than inflation rates in the single digits.

One prevalent claim is that while recession affects everyone in the economy, inflation only affects those who lose their jobs. While inflation does not immediately affect income levels across the economy, a recession does.

But some economists have argued that recession is not the worst economic situation. Although the recession is not a negative economic condition, it occurs in the short term. According to them, recessions help to clear the unnecessary expenses of an economy.

Relationship between inflation and recession

Higher inflation can be considered one of the critical factors that cause a recession. Because if there is higher inflation, higher costs of businesses go bankrupt and unemployment levels soar.

In this situation, stagflation occurs. Stagflation is the economic situation that higher inflation, slower economic growth (stagnation), and increasing unemployment all happen simultaneously.

To read more, kindly click on “What is Stagflation? – With examples”

Differences Between Inflation and Recession

Differences Between Inflation and Recession

1. Inflation is the increase in the general price level of goods and services. Recession means a period of negative or very weak economic growth.

2. There are three types of inflation. They are demand-pull inflation, cost-push inflation, and built-in inflation. Types of recession are boom and bust recession, balance sheet recession, and supply side shock recession.

3. The main reasons for inflation are hoarding, population growth, indirect taxes, public spending increasing, and international debt. A recession can be occurred because of trade wars, interest rate rise, fiscal austerity, asset price fall, and a shift in consumer behavior.

4. The effect of inflation is increasing the prices and decreasing the real value of money while in a recession, the output level of the business organizations is decreased and then they have to lay off employees (increase in unemployment).

5. Inflation can occur in economic expansion but recessions occur when the economy is going down.

6. Inflation is measured based on the indicators such as the Consumer Price Index (CPI), and GDP Deflator while a recession is a period of a minimum of two consecutive quarters of negative GDP.


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