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Difference between Recession and Inflation
The terms recession and inflation are commonly used in discussions of the economy. We may not be able to predict the long-term effects of economic cycles like contraction, peak, expansion, and trough, even if we experience many of them. While we can probably all agree that neither of these scenarios bodes well for the expansion of the economy, the following paragraphs will demonstrate that the causes and consequences of these two scenarios are diverse.
What is Recession?
The economy has slowed down as a whole as a result of the two consecutive quarterly declines in Gross Domestic Product. The economy as a whole has slowed down. Recessions are characterized by high unemployment, low commodity prices, a drop in the value of assets, and bad sales, however, they are not as severe as depressions.
When the economy is in a slump, business is slow. This undermines people's faith in the economy. There have been about thirty-three global economic downturns since 1854.
Each recession has its own unique causes, however, some of the more frequent ones are as follows −
Low levels of consumer confidence in the economy – Consumers' lack of faith in the economy causes them to alter their purchasing habits, buying just the bare essentials.
When the unemployment rate is high, people tend to consume less, which drags down revenue. Thus, there is a need for enterprises to cut costs. Some positions may become obsolete as time goes on. The result is a high rate of unemployment.
Too high-interest rates might limit liquidity, cutting back on the money that could be invested in the economy.
As a result of losing equity as home prices and sales have fallen, homeowners have had to cut back on discretionary expenditure.
Actions to Reduce Regulations Downturns in the economy might be exacerbated by government regulations.
What is Inflation?
Cost of living inflation is the general rise in prices over time across all sectors of an economy. Because of this, the purchasing power of one currency unit may decrease, leading to depreciation. Some economists argue that a small amount of inflation is actually beneficial for an economy, but most agree that high inflation is a sign of an overheated economy.
The rising demand for goods and services that comes with an expanding economy is what ultimately leads to inflation. As the economy grows, inflation always follows. Because of this discrepancy between supply and demand, prices have risen. Inflation is measured as a percent change from the preceding year and indicates a decline in buying power. Their worth is measured in part by the Wholesale Price Index (WPI), and in part by the Consumer Price Index (CPI) (CPI).
The following components comprise inflation −
A demand-pull inflation happens when an economy experiences a surge in demand for goods and services that exceeds what it can supply.
Cost-push inflation occurs when an increase in the price of raw materials causes a subsequent increase in the price of finished goods.
The term "build-in inflation" refers to price increases that are caused by factors in the past but have an effect on the present. Therefore, workers might ask for a salary increase, which would push up the cost of consumer products and services.
Inflation benefits individuals who own assets since it raises their worth. However, this condition does not benefit those who hoard cash because of the declining value of the currency.
The central bank should adopt steps to curb inflation through its monetary policies, in which it is tasked with determining the rate and extent of money supply expansion. Inflation can be controlled with these methods.
Differences − Recession and Inflation
The following table highlights how Recession is different from Inflation −
| Characteristics | Recession | Inflation |
|---|---|---|
Definition |
A recession is defined as a period of declining economic activity, typically marked by a decline in GDP for two consecutive quarters. |
A rise in the general cost of living across an economy is referred to as inflation. To quantify a downturn, economists look at the GDP. |
Measure |
Certain economic conditions must exist before a recession may occur. |
Inflation is measured by two different indices: the Wholesale Price Index (WPI) and the Consumer Price Index (CPI). |
Period |
A recession is more likely to occur under certain economic conditions. |
Some degree of inflation is inevitable in any economy. |
Conclusion
A "recession" is a period of time in which the level of economic activity drops generally. This is the case when the GDP falls for two consecutive quarters. Recessions are measured in terms of their impact on GDP.
In contrast, inflation refers to a general rise in prices throughout an economy over time. It is measured by the difference between the Wholesale Price Index (WPI) and the Consumer Price Index (CPI). Unfortunately, both of these issues can be traced back to unfavorable economic consequences.
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