Inflation vs Recession

The main difference is that inflation is the increase in goods prices, whereas recession is a steep decline in business activities. Where inflation is seen as an unavoidable reality associated with every economy, nations go out of their way to avoid a recession.

Inflation reduces the purchasing power of money, and recession brings down employee wages. Substantial price inflation can trigger a chain reaction—demand drops—production is reduced—unemployment increases. In comparison, a recession is defined as a negative gross domestic product.

• Inflation is the increase in the market price of goods and services. In contrast, recessions are a period of stagnation in economic activities that causes financial crises for the entire economy.
• All governments try to avoid recessions and inflation. economy. The central banks introduce new monetary policies or amend existing ones to control the economy.
• A recession is likely due to unemployment, lack of resources, or diminished economic activities. Recession always results in financial crises, but inflation does not always cause problems. Mild inflation can even be beneficial.

Now let us consider a comparative table to understand inflation vs recession comparisons and differences.

Inflation is the rise in the price of goods and services (across the entire economy or country). Inflation occurs due to an increase in demand (demand-pull inflation) or a rise in the cost of production (cost-push inflation). Change in demand or cost in production is caused by political, economic, and social factors.

As a consequence of inflation, the buying power of money falls. As a result, consumers end up paying more for products they were paying less in the past.

It is an important financial measure to ascertain a country's cost of living fluctuations. A low level of predictable inflation boosts economic activity in an economy and hence is considered desirable.

Let us look at an example to understand inflation. David and his four friends are huge cinema lovers. So in 2019, they were excited to discover that their favorite director was making a new film. Since the movie was just in the making and was supposed to be released after 18 months, they made a pact to watch it together in a theatre.

To ensure everyone sticks to the deal, David immediately collects cash and puts it in a collection box. The prevailing price of a single movie ticket was about $9, so everyone parted with $9.

9 x 5 = $45

Time passed, and by the time the movie was released, it was 2022. David and his friends were still excited about the movie. But now the movie ticket prices have increased; one ticket costs $18.

David and his friends only had $45, but the total cost of movie tickets had doubled.

18 x 5 = $90

Within two years, the whole economy got altered. The purchasing power of $45 is no longer what it was. Therefore, inflation is inversely proportional to the purchasing power of money. Deflation is the opposite, but it is highly unlikely in capitalistic markets.

The government measures inflation by comparing the price of a basket of goods and services of the current year with the same basket from the previous year.

A recession is a period of financial crisis within an economy. When recession strikes, people lose jobs, companies struggle, and profits dwindle. Consequentially, consumers stop making large or unnecessary purchases—the whole market system collapses.

It only worsens from then on—unemployment rises—fewer jobs mean meager pay scale—overqualified individuals take up menial jobs to make ends meet (disguised unemployment).

A recession disturbs the demand-supply balance. Though the recession is considered a negative economic phenomenon, it is still appreciated when it occurs (short-term), as it instills a sense of vigilance in the individuals and administration of the economy.

Also, recessions are an inevitable part of business cycles. They are likely to arise. And they should arise once in a while because they help economies halt careless or unnecessary expenditures.

Interestingly, out of many causes of recession, like debt, stock market crash, economic shock, and shift in technology, inflation is one of the critical causes of recessions. When inflation rises, people and businesses must spend excessively to operate. Ultimately, businesses go bankrupt—unemployment levels soar.

The recession vs inflation discussion is incomplete without citing the US example. The US suffered many recessions, notably the financial crisis of 2008. Lehmann Brothers collapsed when the housing bubble burst—the stock market crashed. The 2008 recession was so severe that it significantly impacted the world economy along with the entire US economy. Hence, it is referred to as the great recession.

The gross domestic product (GDP) has long been considered one of the major indicators of economic recession. However, the NBER states that the decline in quarterly GDP does not necessarily mean recession. In the US, the National Bureau of Economic Research (NBER) has an accredited authority to define US recessions' start and end dates.

Economists debate inflation vs recession vs depression. All three phenomena are interlinked—one causes the other. High inflation leads to recession. And in the long-term, if recessions are not handled, it becomes an economic depression. Depression is considered the most intense form of economic crisis.

• Both inflation and recession are periods of stress for the common folks. As a result, the average citizen is forced to alter their lifestyle (to survive financially).
• Both can last long-term. It can permanently change and trigger a paradigm shift in economic activities and consumer spending (money management).
• Governments try to avoid both phenomena. The central banks introduce various monetary and fiscal policies to de-escalate recession or inflation predicaments.
• In the long term, inflation and recession can cause irrevocable economic damage. It can push a country decades back.
• Inflation and recession often co-exist. They are interlinked because one can cause the other.

This has been a guide to Inflation vs Recession. Here, we compare them based on similarities and differences between them. You can learn more about it from the following articles -

• Inflation vs Deflation
• Deflation vs Disinflation
• Potential GDP