If you're worried about the rising cost of living, you may be considering the inflation vs recession debate. There are two types of inflation, Cost-push, and Demand-pull. Inflation during a recession is typically considered to be Cost-push. However, you can also have Built-in inflation.
Cost-push inflation
Cost-push inflation is inflation fueled by increases in the costs of production, such as wages and raw materials. It occurs when the costs of production exceed the supply of the economy. While this may lead to an increase in the price of a good, it is important to note that demand-pull inflation is different from cost-push inflation.
Cost-push inflation is also caused by supply disruptions, like major natural disasters. These disasters disrupt production chains and can cause companies to raise prices to cover their losses. However, not all natural disasters lead to increased prices - some only cause a temporary spike in production costs.
Built-in inflation
There's a lot of debate over the role of inflation in the economy. While some argue that inflation is a cause of the recession, others argue that inflation is a symptom of a broader recession. The two are not synonymous, and neither is good for the economy. While inflation feels bad because money is worth less, a recession feels bad because fewer people are working.
One of the most important factors to consider in deciding whether an economy is experiencing recession is how much inflation is currently happening. The general public expects inflation to continue, so demand and action adjust accordingly. In a high-inflation period, producers and fabricators raise prices because the public expects them to do so. Meanwhile, lenders add a "price premium" to their normal interest rate in anticipation of the decline in purchasing power of the dollars they lend. And workers insist on higher wages when prices rise.
Cost-push inflation during a recession
Inflation is the result of a combination of higher prices and lower demand. In a recession, cost-push inflation is particularly harmful. When the economy is struggling, it becomes more difficult for manufacturers to sell their products at a profit. Therefore, they often increase prices to cover the increased costs.
One solution to reducing cost-push inflation is to implement supply-side policies. By increasing aggregate supply, governments and central banks can reduce the costs of goods and services. This would increase productivity and shift the AS curve to the right. However, such measures would take a long time to take effect.
Fiscal policy to mitigate the pain of a recession
Using fiscal policy to mitigate the pain of a recession is a great way to help the economy recover. It is especially useful if it is implemented early in a recession. For example, providing SNAP benefits and cash payments to the neediest households can help the economy recover more quickly. It can also help prevent businesses from cutting jobs because of weak demand. Moreover, increased government investment programs do not immediately boost aggregate demand, but they can help the economy return to full employment more quickly, preventing the human costs of a slow recovery. This is especially important because a slow recovery can have negative consequences for future growth.
When the economy is in recession, personal incomes will fall. A highly progressive tax system can help cushion this pain by raising taxes on higher incomes. This leaves more money for spending in the hands of consumers. However, this also means that government tax revenues will fall, requiring policymakers to cut government expenditures to make up for the loss in revenue.
Effects of stagflation
While both recession and stagflation can be detrimental to an economy, there are differences between the two. While recessions usually last less than one year, stagflation can last much longer. In the United States, for example, the unemployment rate peaked in 1982 at 10.8%. While stagflation can cause a prolonged period of unemployment, it is best avoided, as it could lead to a recession.
Recessions are widespread economic contractions and can have many causes. A recession generally lasts at least six months and is characterized by low or negative growth. A period of stagflation, in contrast, has a high inflation rate but a lower rate of growth. This slows down the economy and makes it difficult to recover.
According to World Bank, the global economy will shrink by 5.2 percent this year.
That would represent the deepest recession since the Second World War, the World Bank stated in its June 2020 Global Economic Prospects.Link for Article
