Question

Why would Year-Ended Inflation rates be a strong indicator to analyse economic recession? Discuss strength and weaknesses.

Answer 1

A recession is a general slowdown in the overall economic activity and is registered as a drop in GDP. amount other reasons, inflation is one of the major causes of a recession. During inflation, the input costs increase for the businesses. Inflation and recession are the two terms that most of us have heard being thrown around by economic experts when talking about the overall economic health of the country. While we often heard that inflation and recession are not good for us, do you know ho they really affect us.

Inflation is a steady rise in the prices of goods and services in an economy over a period of time. When prices rise every single unit of the currency purchases lesser products and/or services. Therefore, inflation reflects the purchasing power of one unit of money. Moderate inflation is good for the economy as it is associated with economic growth. High inflation is usually the sign of an overheated economy.

Usually, as the economy grows, people spend more money on products and services. In other words, when the economy grows, the demand is more than the supply of goods/services resulting in an increase in prices. This leads to an increase in the inflation rate. However, if the economy grows too fast, the demand grows faster leading to rapidly increasing prices.

On the other hand, when economic growth slows down, the supply of goods/services is proportionate to the demand and the inflation rate drops. This is called disinflation.

As discussed earlier, a recession is a general slowdown in the overall economic activity and is registered a drop in GDP. Among other reasons, inflation is one of the major causes of a recession. During inflation, the input costs increase for the businesses as well. Therefore, businesses pull the brakes on production, cut down on salaries, and adopt cost-cutting measures. A prolonged and pronounced recession is called economic depression

Usually, a recession happens when the majority of people in an economy reduce spending. There are various factors that can trigger an overall reduction in spending like high-interest rates, reduced wages, and above all inflation.

Inflation is not the main cause of recessions. Usually, recessions are caused by factors such as high-interest rates, fall in confidence, fall in bank lending and decline in investment. However, it is possible that cost-pus inflation can contribute to a recession, especially is above nominal wage growth.

In economics, stagflation, or recession-inflation is a situation in which the inflation rate is high, the economic growth rate slows and unemployment remains steadily high. It presents a dilemma for economic policy since actions intended to lower inflation may exacerbate unemployment.

The direct cause of soaring prices is printing too much paper money; the direct cure is to stop printing it. The indirect cause of inflation is government overspending and unbalancing the budget. The indirect cure is to stop overspending and to balance the budget. In its later stage of inflation trends to bring about disorganization and demoralization of business, This tends to do in several ways. First, when an inflation has long gone on at a certain rate, the public expects it to continue at that rate. More and more people's actions and demands are adjusted to that expectation. This affects sellers, buyers, lenders, borrowers, workers, employers. Sellers of raw materials ask more from fabricators, and fabricators are willing to pay more. Lenders ask more from borrowers. They put a price premium on top of their normal interest rate to offset the expected decline in purchasing power of the dollars they lend. Workers insist on higher wages to compensate them not only for present higher prices but against their expectation of still higher prices in the future. The result is that costs begin to rise at least as fast as final prices. Real profit margins are no longer greater than before the inflation began. In brief, inflation at the old rate has ceased to have any stimulative effect. Only an increased rate of inflation, only a rate of inflation greater than generally expected, only an accelerative rate of inflation, can continue to have a stimulating effect. Actually inflation breeds recession. Economic recessions are caused by a loss of business and consumer confidence. As confidence recedes, so does demand. A recession is a tipping point in the business cycle when ongoing economic growth peaks, reverses and becomes ongoing economic contractions (recession). A decline in the gross domestic product growth is often listed as a cause of a recession., but it's more of a warning signal that a recession is already underway. That's because GDP is only reported after a quarter is over. By the time GDP has turned negative, the recession is probably already been underway for a couple of months. Thus the year-end inflation rate is an indication of the recession.