Inflation, Recession and Deflation

A general increase in prices and fall in the purchasing value of money. Inflation is a measure of the rate of rising prices of goods and services in an economy. Inflation can occur when prices rise due to increases in production costs, such as raw materials and wages. A surge in demand for products and services can cause inflation as consumers are willing to pay more for the product.

A recession is a period of economic contraction, where businesses see less demand and begin to lose money. To cut costs and stem losses, companies begin laying off workers, generating higher levels of unemployment.

When the overall price level decreases so that inflation rate becomes negative, it is called deflation. Deflation is worse than inflation because interest rates can only be lowered to zero. This happens when price decreases lead to lower production levels, which, in turn, leads to lower wages, which leads to lower demand by businesses and consumers, which lead to further decreases in prices.

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