Why does inflation based on the Retail Price Index increase when the economy is in recession?
A recession is defined as a decline in production for 2 consecutive quarters. That is supply of goods and services falls. Now if demand for goods and services doesn’t fall as much, then price of goods and services will go up. Hence the retail price index goes up, and inflation takes place. The key is that there could be divergence between what producers and consumers think. If supply falls more than demand, then producers are more pessimistic about the state of the economy than consumers are. Producers are cutting back production anticipating demand will fall, but consumers demand isn;t falling yet. Alternatively it could be due to stock piling during good times. To many, this recession comes as a surprise. Many were fooled by the ‘inflation is dead’, ‘permanent growth’ chicago type school stories. Hence producers could have huge stockplies in their warehouses. As the economy shows signs of slowing, the producers slow down production now, knowing they can draw down on their stocks and
Related Questions
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- Why wholesale price index is considered in calculating the inflation rate not the consumer price index?
- Why does inflation based on the Retail Price Index increase when the economy is in recession?
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