Inflation vs Recession – Forbes Advisor INDIA

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From rising inflation to recession fears, there is a lot of talk about negative economic conditions. Inflation and recession are important economic terms, but what do they really mean? Let’s take a closer look at their differences.

What is inflation?

Inflation is a measure of the gradual, broad increase in prices throughout the economy. It is usually expressed as a percentage that represents the rate at which the cost of goods and services has increased over the past year.

Minimal inflation is expected and even encouraged. However, it becomes problematic if the inflation rate gets too high. In India, a common measure of inflation is the Consumer Price Index (CPI), a basket of items that consumers buy frequently. This basket includes food, shelter, clothing, transportation and health care.

Excessive inflation can severely affect the economy. From grocery store prices to the fuel in your car, high inflation means everyday necessities become much more expensive.

When prices go up, consumers have less money to spend on goods and services. People are adjusting their financial habits, which overall can slow economic growth across the economy and potentially lead to higher unemployment. Businesses may see lower demand and higher costs.

What Causes Inflation?

So what causes inflation? There are several factors:

  • cost pressure inflation. This happens when the prices of key goods and services, such as raw materials and labor, rise. When companies have to pay much more for inputs, they pass the cost on to consumers in the form of higher prices.
  • demand-pull inflation. When there is too much money and demand is chasing too few goods, it can push up inflation. It can be caused by increased government spending or a tax cut that puts more money in people’s pockets. When demand for goods is greater than supply, prices rise.
  • inflation expectations. Anticipating future price gains can lead people and businesses to expect higher inflation. As a result, workers may demand higher wages to offset the rise in the cost of living — but this loop may create a self-fulfilling prophecy: fears of inflation are compounding the problem.

What is a recession?

A recession is an economic downturn, typically defined as two consecutive quarters of declining gross domestic product (GDP) growth. When the economy shrinks for six months or more, it’s generally said to be in recession.

However, the official definition of a recession is a bit more complicated. In India, the RBI is charged with assessing the start and end dates of recessions. His definition of a recession is a “substantial decline in economic activity that cuts across the economy” lasting more than a few months, according to data for GDP, income, employment, industrial production and sales.

During a recession, unemployment rates rise, wages can stagnate, and people typically have less money to spend. These factors mean there is less demand for goods and services, which can further hurt the economy.

What Causes a Recession?

Recessions are caused by the following developments:

  1. Reduced consumer spending. When people have less money to spend, they buy fewer goods and services. This reduced demand can cause companies to reduce production, leading to layoffs and increased unemployment.
  2. Iincreased business costs. Businesses may be forced to increase prices to offset higher costs such as material or labor costs. This can lead to inflation and lower consumer spending.
  3. Reduced lending. When banks are reluctant to lend money, it can affect companies’ ability to expand or invest in new projects. This reduced lending can lead to a slowdown in economic growth.
  4. stock market declines. A fall in stock prices can contribute to a recessionary environment by reducing the wealth of individuals and companies. This can result in less spending and investment, further slowing the economy.

Recessions are usually fairly short. On average, recessions last about 10 months. Then the economy usually recovers and even exceeds the level before the start of the economic downturn.

Inflation vs Recession: Which is Worse?

Inflation and recession are very different economic phenomena, but they are inextricably linked.

High inflation rates can signal an imminent recession as companies respond to higher costs by cutting output and raising prices. And if the RBI takes action to curb rising inflation in the form of further rate hikes, there is a risk that this could help trigger a recession.

According to the Economic Policy Institute, economists have differing opinions on which is worse for an economy, a recession or rising inflation. A common argument is that inflation is worse than a recession because it affects everyone. In contrast, a recession — and the job losses that come with it — can affect a smaller number of people.

However, opponents of this school say that recessions reduce incomes for everyone in the economy. With unemployment during a recession, productive resources are also lost, particularly labour, causing the economy to produce less.

It can be difficult to decide which is worse for the economy: inflation or recession. Both negatively affect various aspects of economic life, such as consumer spending and lending.

But by understanding the differences between these two conditions, you can make informed decisions about how to manage your finances and investment portfolio during times of rising inflation or a recession.

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