Term Deflationary Recession Explained

Readers Question What is meant by the term deflationary recession?

A recession is a period of negative economic growth. (official definition is a period of negative economic growth for two consecutive quarters) see: Definition of Recession

Deflationary pressures imply a fall in aggregate demand. This leads to a lower rate of growth or a fall in GDP and consequently a lower inflation rate. Strong deflationary pressures may also cause inflation to become negative. i.e. a fall in prices known as deflation. definition of deflation

So all recessions have deflationary pressures. However, when people talk of a ‘deflationary recession’. They may mean a recession with an actual fall in the general price level. i.e A fall in output and deflation.

Deflation tends to make a recession more serious and makes the recession closer to the definition of a depression.

For example, in the UK’s past two recessions 1981 and 1991 – the rate of inflation fell. But inflation always remained positive.

In the current recession, the RPI measure of inflation is negative. So with the recession we also have deflation.

(Although just to confuse things, the official measure of inflation CPI is still positive so I would argue we are not experiencing deflation just yet) But, it might occur soon.

Some people also refer to current recession as the Great Recession – because of its scale and magnitude

By on May 7th, 2009

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