Readers Question: is inflation cause recession?
No. There was a time in early 2008, when the cost push inflation reduced living standards causing falling spending. Also the cost push inflation encouraged Central Banks to keep interest rates higher than perhaps they should have. It was only when the cost push inflation started to fall that Central Banks have been aggressively cutting interest rates.
However, this cost push inflation is not the real cause of the recession.
The main causes of this Recession are
- Credit crunch – Boom and Bust in credit markets has led to shortage of finance and therefore less investment.
- Falling house prices – falling house prices are causing lower wealth and consumer spending
- Loss of confidence – bank collapses, falling stock markets and falling house prices have all changed consumer and business expectations meaning people are more willing to save than spend.
2 comments ↓
Good summary of the causes of the recession. Seems to me that most governments’ have tackled the cause in that they have rescued banks. However, they have not done much about the deterioration in household balance sheets (item No 2 above). The US monetary base has doubled in the last quarter (which is unprecedented). I got this from an article in the Wall Street Journal. But I suspect most of this new money has gone to banks. Indeed too much of it has gone there, since banks are busy doing precious little with the money other than buying government stock. The US government has dished out about $1,000 worth of tax rebates or reductions per household, as I understand it, but this is chicken feed compared to the drop in value of the average house.
That was a well composed piece of answer.Stock market crashes, sharp increase in oil prices and globalization can also be added to the list..I guess…
Leave a Comment