Recession and Inflation – Relationship explained
While there seemed to be a sudden spike of enthusiasm among the youth on investment decisions, the World Back became a killjoy with regard to this optimistic environment. Lay-offs became a leading light in the current economic condition as companies started looking for every means to survive this downturn until sales spike up to dependable conditions.
All of this accounts to economic slump called ‘Recession’.
While there seemed to be a sudden spike of enthusiasm among the youth on investment decisions, the World Back became a killjoy with regard to this optimistic environment. Lay-offs became a leading light in the current economic condition as companies started looking for every means to survive this downturn until sales spike up to dependable conditions.
All of this accounts to economic slump called ‘Recession’.
To comprehend what exactly is happening, we’ll figure out the two buzzwords in the market at the moment: Inflation & Recession.
This reduction in money supply is fertile for recession which happens due to fall in economic activity. What could be the possible reason for this recession? An idea is that, a boom in the economy results in inflation, and when you try to control inflation, you have a dip or slump called recession. Recession is commonly defined as the two consecutive quarters of economic contraction. “It is a significant decline in economic activity that is spread across the economy and lasts more than a few months.”, defines the National Bureau of Economic Research.
The effects of recession might quite possibly amplify the effects of inflation although it is in the cooling period. Since recession is roughly the slowdown of economic activity, businesses struggle to keep their head above water and lay off employees to curtail expenses until the resumption of reliable economic activity. Since labor is one of the crucial factors of economic activity, there will be a spike in unemployment.
And, this will last about a few months or up until the output that has plunged among businesses goes up significantly.
The gist of rise in inflation is in its cyclical behaviour, meaning, when there is a lot of economic activity in the form of sudden spurt in production and the industries seem to be set up in plenty. As a result, the economy booms or let’s say, overheats. (See the video above)
Why? There’s a substantial increase in income generation and at the same time the Central Bank also starts printing money in the initial stages. Subsequently, the economy observes a rise in price level which therefore turns out to be inflationary. When this inflation kicks in, the Central Bank tries to bring down the supply of money by increasing the interest rate.
This automatically reduces the money supply since the demand for money increases and consequently the economic activity reduces.
This is because the investors start chasing interest rates and not economic activity. So, when this happens, economic activity slows down and inflation declines. Hence, Cyclical!
Sounds simple right? Well not really.
This automatically reduces the money supply since the demand for money increases and consequently the economic activity reduces.
This is because the investors start chasing interest rates and not economic activity. So, when this happens, economic activity slows down and inflation declines. Hence, Cyclical!
Sounds simple right? Well not really.
This reduction in money supply is fertile for recession which happens due to fall in economic activity. What could be the possible reason for this recession? An idea is that, a boom in the economy results in inflation, and when you try to control inflation, you have a dip or slump called recession. Recession is commonly defined as the two consecutive quarters of economic contraction. “It is a significant decline in economic activity that is spread across the economy and lasts more than a few months.”, defines the National Bureau of Economic Research.
The effects of recession might quite possibly amplify the effects of inflation although it is in the cooling period. Since recession is roughly the slowdown of economic activity, businesses struggle to keep their head above water and lay off employees to curtail expenses until the resumption of reliable economic activity. Since labor is one of the crucial factors of economic activity, there will be a spike in unemployment.
And, this will last about a few months or up until the output that has plunged among businesses goes up significantly.
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