Difference Between Inflation and Recession

difference between inflation and recession

The difference between inflation and recession is that inflation is the term used to refer to a general increase in the price level whereas recession is the rate of reduction in economic activity.

The terms Inflation and recession are very common in economic discussions. Although we experience different business cycles of contraction, peak, expansion, and trough, we may not predict the economic outcome of each cycle. Inflation and recession are two main aspects of macroeconomics which means they affect the economy as a whole.

While we all know that these two terms do not support economic growth in any way, their causes, as well as their impact on the economy are different, as outlined below.

What is Inflation?

Inflation is the increase in the price of products and services over time in the economy. Furthermore, each unit of currency buys inferior services and products, thereby weakening the currency. Although economists claim moderate inflation is beneficial for the economy, high inflation signals an overheated economy.

Inflation occurs as a result of economic growth leading to higher demand for products and services. As a result, demand beats supply, causing prices to rise. Inflation is expressed as a percentage and indicates a decrease in the purchasing power of a currency. It is measured using the Wholesale Price Index (WPI) and the Consumer Price Index (CPI).

Inflation is classified into:

  • Demand-pull inflation – This is inflation caused by an increase in demand for products and services that is higher than an economy can produce thereby creating a demand-supply gap.
  • Cost-push inflation – This is inflation caused by an increase in the cost of production which causes an increase in the price of the final product.
  • Build-in inflation – This is inflation caused by past events and persists in the present. As a result, workers may demand wage increases which result in increased costs of products and services.

Inflation benefits asset holders when the value of the asset rises. However, it does not benefit people who hold cash because the value of the currency decreases.

Inflation must be regulated using measures through monetary policy in which the central bank determines the rate and size of growth in the money supply.

What is Recession?

A recession is an overall decline in economic activity as a result of a decline in Gross Domestic Product for two consecutive quarters. Although less severe than the depression, a recession is characterized by high unemployment, low commodity prices, falling asset prices, and low sales. This lowers confidence in the economy. The number of recessions worldwide is about 33 since 1854.

Some of the known causes of recession include:

  • Low consumer confidence in the economy – When consumers have low confidence in an economy, spending habits change, and people consume only necessities.
  • High unemployment rate – this results in low consumption which in turn leads to a decline in sales. Entrepreneurs are therefore forced to cut costs. Some positions may also become redundant. This leads to a high unemployment rate.
  • High interest rate – High interest rates limit liquidity, reducing the amount of investment in an economy.
  • Decrease in housing prices and sales – Owners of housing are forced to reduce spending as a result of the loss of equity.
  • Deregulasi – Some government regulations can cause a recession.
  • War – Economic resources are eradicated and wasted due to war and natural disasters, and GDP can be severely affected in the case of a significant scale of damage.

In an effort to save the situation, the government can adopt macroeconomic policies such as reducing taxes, increasing government spending and increasing the money supply.

Difference Between Inflation and Recession

Definition

A recession refers to an overall decline in economic activity as a result of a decline in Gross Domestic Product for two consecutive quarters. On the other hand, inflation refers to the increase in the price of goods and services over time in the economy.

Benchmark
While recession is measured by Gross Domestic Product, Inflation is measured by Wholesale Price Index (WPI) and Consumer Price Index (CPI).

Point
While a recession only occurs under certain economic conditions, inflation occurs continuously in an economy.

Red Thread | A recession refers to the overall decline in economic activity as a result of a decline in Gross Domestic Product for two consecutive quarters and is measured by Gross Domestic Product. On the other hand, inflation refers to the increase in the prices of products and services over a period of time in an economy. It is measured by the Wholesale Price Index (WPI) and the Consumer Price Index (CPI). But both are caused by unfavorable economic outcomes.