Inflation and recession are two economic states that tend to work against each other. When there is inflation, there is economic growth, and when there is a recession, there is always economic decline. There is a lot of debate among economists about whether or not inflation and recession can exist at the same time.
What is a Recession?
A recession is a “sustained period of weak or negative growth in real GDP (output) accompanied by a significant rise in the unemployment rate. Many other indicators of economic activity are also weak during a recession” [Source]. During a recession, many people lose their jobs, and employers find it hard to replace the workers [Source]. Those fortunate enough to keep their jobs suffer pay cuts and other benefits removed from their payslips. The unemployment rate skyrocketed amid a recession, putting pressure on the government to cater to jobless citizens who might be plunged into poverty by the prevailing economic conditions. The recession slows economic activities such as trade and production, and demand and supply rise to excessive levels.
Examples of Recessions in History
Popular examples of recessions in history are the Great Recession witnessed between 2007 and 2009 on a global scale [Source]. There is also the Great Depression which is described as the worst economic downturn in US history. Another common one is the Coronavirus Recession that has affected all countries, especially the developing nations.
Recession and Inflation differences
The difference between recession and inflation is that recession refers to an “overall drop in economic activity as a result of a drop in the Gross Domestic Product for two consecutive quarters .”On the other hand, inflation refers to an “increase in the price of products and services over a period of time in an economy” [Source]. Gross Domestic Product measures recession, and inflation is measured by the Wholesale Price Index and the Consumer Price Index. During inflation, the economy moves faster, with prices being hiked at an uncontrollable rate and a higher cost of living for the average consumer. A recession is the opposite of inflation since the economy will move at a slower pace, and there will be a decline in economic activity. High inflation usually causes a drop in unemployment, while recession triggers a high unemployment rate. Under inflation, people’s money is worthless, but the economy tends to create few jobs in a recession. Inflation is inclined to the value of money, while a recession is about the output of an economy. Because of inflation, prices of commodities and services keep increasing while a recession stops economic activities such as trade and production and reduces the supply of basic goods.
Can Inflation Trigger Recession?
Most economists concur that inflation is likely to trigger a recession. Cost-push inflation is highlighted as a form of inflation that can cause a recession, especially when inflation is above the nominal wage growth [Source].
Can you have Inflation during a Recession?
In a normal economic environment, inflation tends to fall during a recession, but this is not always the case. People might witness inflation during a recession, termed ‘stagflation’ or recession inflation. Stagflation or recession-inflation is a “situation in which the inflation rate is high, the economic growth rate slows, and unemployment remains steadily high” [Source].
Is it Possible to decrease Inflation without causing a Recession?
Various proposed ways of reducing inflation without causing a recession include increasing productivity so that demand and supply are satisfied. Monetary tools can also decrease inflation to raise interest rates, which will slow the economy but does not put it into recession.