NOT POSSIBLE TO LOWER INFLATION WITHOUT A RECESSION

INFLATION: WHAT IS IT?

The gradual, widespread increase in prices across the economy is known as inflation. The cost of products and services has increased during the past year at a specific rate, which is typically stated as a percentage.

In fact, a small amount of inflation is encouraged. But if the rate of inflation rises too high, it becomes a concern. The consumer price index (CPI), a compilation of frequently purchased goods, is a popular way to gauge inflation in the United States. Food, shelter, clothing, transportation, and healthcare are all included in one basket.

The economy can be negatively impacted by excessive inflation. Due to the high rate of inflation, everything from grocery store prices to gas for your car is getting significantly more expensive.

Consumers have less money to spend on goods and services when prices rise. People make changes to their spending patterns, which collectively can slow down economic growth overall and possibly increase unemployment. There may be less demand and higher costs for businesses.

WHY DOES INFLATION OCCUR?

What then triggers inflation? Numerous aspects exist, including:

price-driven inflation This occurs when the costs of the essential components of goods and services, such as labor and raw materials, increase. Companies pass on the expenses to customers in the form of higher pricing when they have to pay significantly more for inputs.

Consumer-driven inflation Inflation can increase when there is an excess of money and demand is outstripping the supply of products. It may result from higher government spending or a tax cut that increases personal income. Prices will increase when there is a greater demand than supply for a good.

expectations for inflation. People and corporations who anticipate future price increases may anticipate increased inflation. Workers may therefore demand more pay to offset the rising cost of living, but this feedback loop could result in a self-fulfilling prophecy: Concerns about inflation make the issue worse.

A RECESSION: WHAT IS IT?

Economic downturns, such as recessions, are often characterized by decreased growth in the gross domestic product (GDP) for two consecutive quarters. Recessions are typically defined as periods of sustained economic contraction lasting six months or longer.

The official definition of a recession, however, is a little more complex. The National Bureau of Economic Research (NBER) in the United States is responsible for determining when recessions begin and conclude. According to its definition, a recession is one that lasts longer than a few months and is evidenced by a "significant decline in economic activity across the economy" according to data on GDP, income, employment, industrial production, and sales.

Unemployment rates rise, salaries may stagnate, and people typically have less money to spend during a recession. Less demand for goods and services results from such conditions, which can further harm the economy.

WHY DO RECESSIONS OCCUR?

The following changes have been associated with recessions:

decreased expenditure by consumers. People buy fewer goods and services when they have less money to spend. Businesses may reduce production as a result of this declining demand, which results in layoffs and more unemployment.

increased costs for businesses. Increased costs, such as the price of materials or labor, may drive businesses to increase pricing. Inflation and a decline in consumer expenditure may result from this.

decreased lending When banks are hesitant to make loans, it might affect businesses' capacity to grow or make new investments. This decreased lending may result in slower economic growth.

The stock market is down. By eroding people's and companies' wealth, a decline in stock values can help create a recessionary atmosphere. Less spending and investment may result from this, further slowing the economy.

Typically, recessions don't last very long. Recessions typically continue for about 10 months. Afterward, the economy typically bounces back and even surpasses its pre-economic decline level.

WHICH IS WORSE: RECESSION OR INFLATION?

Although recessions and inflation are fundamentally distinct economic events, they are inextricably intertwined.

As a result of firms responding to greater costs by cutting production and raising prices, high inflation rates might signal the start of a recession. Additionally, there is a chance that the Federal Reserve's decision to increase rates further in an effort to reduce inflation could contribute to the start of a recession.

The Economic Policy Institute reports that economists' views differ on whether a recession or rising inflation is worse for the economy. One prevalent claim is that because it affects everyone, inflation is worse than a recession. A recession, on the other hand, may have a smaller social impact due to the concomitant job losses.

Recessions, according to those who oppose that school, lower everyone's income across the board. In addition to joblessness during a recession, there is a loss of productive resources, particularly labor, which lowers economic output.

Deciding whether inflation or recession is worse for the economy can be challenging. Both have a detrimental effect on various facets of the economy, including lending and consumer spending.

But you can manage your finances and investment portfolio in times of rising inflation or a recession by being aware of the distinctions between these two situations.

IS IT POSSIBLE TO DECREASE INFLATION WITHOUT CAUSING A RECESSION

Is it possible to lower inflation without also triggering a recession and the consequent rise in unemployment that follows? The conventional response is "no." Whether they subscribe to the "inertia" theory of inflation, which holds that today's inflation rate is caused by yesterday's inflation, the state of the economic cycle, and external influences like import prices, or the "rational expectations" theory, which holds that inflation is caused by employees' and employers' expectations, combined with a lack of credible monetary and fiscal policies, most economists concur that tight monetary and fiscal policies, which cause rapid inflation, are not the cause of inflation. They note that in the 1980s, several European and American countries defeated high inflation—by these nations' standards—but only by enacting strict monetary and fiscal measures that significantly raised unemployment. However, some governments' policymakers are adamant that reducing inflation can be accomplished without strict monetary and fiscal policies by directly controlling wages and prices. Unfortunately, because this strategy does not address the root causes of inflation, wage and price controls eventually fail, previously repressed inflation reappears, and while policymakers are successful in avoiding a recession, a frozen structure of relative prices imposes distortions that harm the economy's prospects for long-term growth.

Esther George, president of the Kansas City Fed, stated in a Wall Street Journal interview that it might not be possible to reduce inflation without starting a recession. George also said it would be logical for the Federal Reserve to lower the rate of rate hikes in 2019.

Market response: The performance of the US Dollar (USD) against its main competitors doesn't appear to be significantly impacted by these remarks. The US Dollar Index stood at 105.94 as of the time of writing, down 0.6% for the day.

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