Inflation and recession one and the same? Related terms?
From last couple of months, you might be watching news that inflation is rising and we are moving towards recession. What exactly it is?
These two are very important economic concepts, but what exactly these two means, let us look into it in detail. Inflation in simple terms general rise in prices of goods and services.
Minimal level of inflation is always encouraged, but if it crosses certain limit, becomes problematic. Inflation is generally expressed in percentage. Excessive inflation always creates negative economic impact. Impact will get reflected on each and every economic activity staring from groceries to luxury spendings.
For the same amount of money will by less and less over the period of time. Wages tend to rise, however that will get set-off against the increased spendings. People with fixed income like pensioners will get hit badly. If it goes beyond the control, makes everyone poorer.
On the other side it will help someone who has debt burden as debt stays as it is, looks cheaper with growing prices.
Inflation and recession are relative terms, but it does not mean that if first one comes in and the second one will also join. It might follow or might not. Both hurt the economy and thereby people but in different way.
Recession simply means economic downtime. It is defined as “Significant decline in economic activity that is spread across the economy and that lasts more than a few months.”
Usually if the economy shrinks for more than six months it would be considered as Recession. Sometimes without knowing the existence of it, we might be facing the impact. Mild recession might not cause sever impact and sustain to hold lesser damage.
Major negative outcome of Recession is unemployment, which takes off the life of many. Hence control measures are necessary.
What causes Inflation?
- Cost push – It happens when prices of inputs go up and that automatically push up the output price.
- Demand pull – When the availability of money is more in the market, which increase the demand than the availability of goods or services.
- Speculation/Anticipation – Anticipation of future rise in price increases the current demand which would make the supply short fall and there by rise in the price.
What causes Recession?
- Decline in stock market contributes a lot to the situation.
- Lack of lending pulls back the economic growth.
- Rise in business cost forces the business to offset.
- Uncertainties also lead to recession as it makes the business decision riskier.
- Oversupply is one of the major causes.
The longer the Recession, harder it is to reverse. It would lead to Economic depression. Appropriate monetary policy, fiscal policy, money supply management and price limit would help to control the inflation and recession.
Proper management of inflation would avoid the recession. Excess of anything is not good, hence it is very important to manage or control these externalities on time.
Prevention is better than cure, hence it is better to take appropriate pre-measures than managing the impact or reversing it.
NOVEMBER 11, 2022 BY Krupa Bhatt (Author of this post)