Inflation is continuous increase in the prices. The rate of inflation sways as the money supply in the system increase or decrease. The Central Bank thus works on this concept. It slows down the economy to tame inflation. It uses different tools to control the inflation rates within a specific range favorable for the economy.

Most common tool is the interest rates. When there is excess of money in the economy the central bank increases the interest rates and when the money in the system decreases the bank cuts down the interest rates to increase the demand and spending.

Recession on the other hand is a decline in the economic activities for a quarter or more. Recession is thus characterized by a decrease in GDP, decline in employment, increase in unemployment, decline in industrial production and consumer price index and decrease in the housing prices. Recession is said to occur when the GDP shows a decline of ten percent or more.

Depression is a term which is confused with recession. Depression is in fact more severe form of recession. Depression is said to occur when the economy faces more severe frequent fall in GDP.  There are many factors which contribute to recession. But the most common one is either an increase or decrease in the prices. Increase in the prices discourages spending which affect the GDP adversely leading to recession.

On the contrary inflation is caused when there is excess of money in the system. As the money in the system increases, the spending increases. This increases the demand. Prices increase when the supply is not able to meet the demand. And this sudden increase in prices reflects in the GDP and consumer price index, common measure of the inflation rates.

Thus as the inflation rates increase the central bank increases the interest rates. This discourages spending and promotes saving. As the demand falls down and spending decline it leads to a decline in the production. A high inflation phase follows recession. The best part that recession thus plays is it reduces inflation.

But it is commonly seen that the prices do not decline during recession. This is because the economy is still expanding, growing at a slow pace due to which the money supply in the system still remains.

This is the situation that we face today. The economy is facing recession; the stock markets are melting down and the government is doing every bit to cut down the interest rates to encourage spending and revive the real estate market. But the prices of the commodities like food and oil still remain high.

Tags: difference between inflation and recession, economic activities, inflation and recession