Readers Question: What is the difference between a recession and deflation?
A recession is a period of negative economic growth. The official definition is a decline in output (Real GDP) for two consecutive quarters.
Usually, in a recession, you will get a fall in the inflation rate.
From 2010, there is a fall in the rate of inflation. Prices are still rising – but they are rising at a slower rate.
Deflation is when we get a negative inflation rate i.e. falling prices.
Since the second world war, recessions have generally not led to deflation – just a lower inflation rate. The last two recessions were caused by attempts to reduce a high inflation rate.
In 2009, there was a brief period of deflation (using RPI method)
For a short-time in May 2008, the RPI (which includes the cost of interest payments) became negative – deflation. But, this deflation did not last very long.
In the 1920s and 30s the UK experienced a considerable period of deflation (falling prices) This was due to
- Low economic growth
- Tight monetary policy – high real interest rates
- Overvalued Pound – Gold Standard caused imports to be cheaper but exports less competitive
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)