Inflation and Recession Resource Network Written By Melissa Snyder and Frank Flanders Ed.D. Consumer Awareness Unit Two Consumer Services

Objective Students will understand the difference between inflation and recession. Students will be able to identify inflation and recession as it relates to consumers.

Inflation Inflation – An increase in the average level of prices of goods and services  Caused By: Supply Demand Energy Cost Increases Natural disasters

Problems Caused By Inflation A. UNEVENESS  Inflation produces uneven increases in the prices of products.  In periods of inflation it is possible of have some products decrease in price, others increase slowly, while others increase quickly.  Some consumers are hurt worse than others. Buyers of gasoline are hit worse than buyers of DVD’s and computers.  People with fixed incomes will see their income fall at the same rate as inflation rises.

Problems Caused By Inflation …….cont B. UNCERTAINTY  Lenders lend money to earn a profit.  To earn a profit, the interest they charge must cover all costs, and be higher than the rate of inflation.  When lenders lend money, they have an expected rate of inflation at the time of the loan.  This expected rate of inflation is based on current rate of inflation, plus a guess about the future If lenders guess right about inflation, they earn a profit. If lenders guess wrong, they lose money.

Negative Inflation Impacts Cost-push inflation Hoarding Hyperinflation

Positive Inflation Impacts Labor-market adjustments Debt relief Room to maneuver

Recession A recession is a business cycle contraction, a general slowdown in economic activity. Employment, investment spending, household incomes, business profits and inflation all fall during recessions. Bankruptcies and the unemployment rate rise. Recessions are generally believed to be caused by a widespread drop in spending.

Impacts of Recession Unemployment Business Social Effects

Unemployment  The full impact of a recession on employment may not be felt for several quarters.

Business  Productivity tends to fall in the early stages of a recession, then rises again as weaker firms close.  The variation in profitability between firms rises sharply.

Social Effects Social effects  The living standards of people dependent on wages and salaries are more affected by recessions than those who rely on fixed incomes.  The loss of a job is known to have a negative impact on the stability of families, and individuals' health and well-being.