Difference Between Recession and Deflation

Readers Question: What is the difference between a recession and deflation?

A recession is a period of negative economic growth. – A decline in output (Real GDP) for two consecutive quarters.This is occuring in many countries. UK real GDP has fallen significantly since mid 2008.

Usually in a recession you will get a fall in the inflation rate.

However, deflation is when we get a negative inflation rate i.e. falling prices.

Since the second world war, recessions have not led to deflation – just a lower inflation rate. The last two recessions were caused by attempts to reduce a high inflation rate.

However, this current recession is so steep and severe that many economists fear that it will lead to deflation. Already, inflation measured by RPI has fallen to 0% and people predict RPI inflation will become negative in future months.

It is this fear of deflation that is encouraging the Central bank to pursue quantitative easing – increasing money supply to create some inflation and help stiumulate economy. (see – Why Quantitative Easing)

Difference Between Recession and Depression.

Interestingly many see deflation as a sign that the economy is experiencing a depression rather than just recession. (Other features of depression include a much bigger and longer fall in GDP)

One Response to Difference Between Recession and Deflation

  1. Ralph Musgrave March 26, 2009 at 6:27 pm #

    I have a slight quibble with the above definition of deflation. Any definition should include the point that the word “deflationary” does not necessarily apply to a scenario where prices are falling. “Deflationary” is often used to refer to a policy or event which dampens or reduces economic activity (but not necessarily to the extent to causing prices to fall).

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