Choose your poison: inflation or recession? Some economists say inflation is worse than a recession, while others disagree. Economists can simply not agree on anything!
Here, I will try to resolve that debate. Both inflation and recession are evils, but which evil is worse for our economy?
Let’s begin with the definitions. A recession is a period of “sustained” weak or negative growth in real gross domestic product (GDP), that is accompanied by high unemployment and weakness in many other economic indicators. Inflation is a general rise in price levels, which erodes purchasing power.
So, in a recession, the economy's performance decreases for an extended period of several months, marked byGDP contraction, higher unemployment rates and lower consumer spending, weak economic activity, such as lower production of goods and services, and lower consumer demand. Feel free to plug in the word “unemployment” next to recession.
With inflation, prices are high, people are working, and many can afford to spend the additional income from their wages to pay the higher prices which are then received by the suppliers, who hopefully pass them on to their workers in the form of higher wages, sustained employment and continued purchasing power. In lay person’s terms, someone somewhere is receiving and benefiting from the high prices that we are paying for the products that we consume. Can somebody say gas companies? Inflation amounts to a redistribution of income; however, it affects the lower income earners disproportionately in that it takes a higher percentage of their income to purchase the same products.
With a recession, there is stagnating or declining incomes due to reductions in employment hours or workforce, increases in the unemployment rate as companies lay off workers, businesses reduce production, manufacturing activity declines, and consumer spending (retail sales) declines because people have less money to spend (www.forbes.com/advisor/investing/what-happens-during-a-recession/).
In a recession, unemployment tends to be high, wages low and people are not able to afford to buy even lower-priced items because they do not have the purchasing power.
According to the Economic Policy Institute (EPI), “many voices in this debate have implicitly or explicitly argued that recession and inflationcause equivalent damage, or that inflationactually causes worse damagethan recession. This view is clearly wrong — the economic damage wrought by recessions is far greater than that by single-digit inflation rates. Inflation, on the other hand, is pure redistribution in the short run, but does not directly reduce incomes in the aggregate.” (www.epi.org/blog/a-recession-would-be-worse-than-todays-inflation/)
Those who say inflation is worse argue that inflation affects everyone, while a recession only affects some people (as they lose their jobs). Yes, only certain people become unemployed in a recession, while everybody pays higher prices with inflation. So, a recession is fine, unless you are one of those who is unemployed. Which would you rather have, a job while paying higher prices, or no job and not be able to buy or afford anything? Yes, inflation punishes the poor, but recession punishes them more and makes them even poorer. When inflation gets worse, it is known as hyperinflation, and when a recession worsens, then you have a depression. The two combined are known as the “misery index.” Recession and inflation are two evils that we do not want to deal with, neither do we want to trade one for the other. So choose your poison, recession or inflation? Neither for me, thanks!
Kojo Quartey is president of Monroe County Community College and an economist. He may be reached atkquartey@monroeccc.edu
The cost of recessions in terms of wages and employment are more regressive. Inflation, however, is a form of income redistribution in the short run, but does not directly reduce incomes in the aggregate.
A recession is a decline in economic activity spread across the economy that lasts more than a few months. A depression is a more extreme economic downturn, and there has only been one in US history: The Great Depression, which lasted from 1929 to 1939.
As Figure 1 demonstrates, inflation tends to decrease during recessions. Source: Bureau of Labor Statistics, Bureau of Economic Analysis, and authors' calculations. Generally, inflation tends to erode TRE growth more than changes in employment, except during severe recessions.
Federal Reserve Chair Jerome Powell speaks during a news conference at the Federal Reserve in Washington, DC, on March 20, 2024. America's central bank doesn't see any signs of a recession on the horizon. Not this year nor the year after.
Deflation can be worse than inflation if it is brought about through negative factors, such as a lack of demand or a decrease in efficiency throughout the markets.
Lower prices — A recession often hits after a long period of sky-high consumer prices. At the onset of a recession, these prices suddenly drop, balancing out previous long inflationary costs. As a result, people on fixed incomes can benefit from new, lower prices, including real estate sales.
Financial advisors and accountants are recession proof businesses because they offer essential services that individuals and businesses need, regardless of the economic conditions.
During recessions, of course, consumers set stricter priorities and reduce their spending. As sales start to drop, businesses typically cut costs, reduce prices, and postpone new investments.
Lenders are hurt by unanticipated inflation because the money they get paid back has less purchasing power than the money they loaned out. Borrowers benefit from unanticipated inflation because the money they pay back is worth less than the money they borrowed.
Increased stress all around. One of the most prevalent ways that recessions affect the average person is simply that stress goes up. It doesn't matter if you're comfortable in your job security and have a hefty financial cushion, or if you're struggling to make ends meet and have $100 in your savings account.
A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough.” Consistent with this definition, the Committee focuses on a comprehensive set of measures—including not only GDP, but also employment, income, sales, and industrial production—to analyze the trends in economic ...
According to the National Bureau of Economic Research (NBER), the average length of recessions since World War II has been approximately 11 months. But the exact length of a recession is difficult to predict. In general, a recession lasts anywhere from six to 18 months.
“The American economy is not in a silent depression. It's not even in a depression at all,” House said. “When we came into 2023, many economists thought we might slide into a recession over the course of the year, but growth in goods and services and in trade have all remained far stronger than we anticipated.”
So yes, inflation has been higher for lower-income Americans. But the spread from bottom to top, 1.5 percentage points, is much smaller than the spread in Dube's wage data in the chart above.
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