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Recession with high inflation: Can anyone really benefit?

Inflation during recession may not seem like such a good thing, because a recession means money is tight for many, while inflation means higher prices. The fact is though that inflation during recession periods may benefit the economy of the country in some ways. Inflation is better than stagflation, which is a term used by Wall Street, because inflation usually occurs when the economy increases, because there is more spending going on. Right now America, and many other parts of the world, do not have this problem because consumers are not spending. Instead consumers and even lending institutions are keeping their cash close, and hoarding it instead of spending it. Inflation can actually help the economy at times, as long as it is a steady rate of inflation. It increases consumer spending, and can stimulate the economy.

Right now the economy is stagnant, with employment at an all time high and businesses closing frequently. Usually the gross domestic product of the United States and inflation go together, with an increased GDP meaning an increased rate of inflation. Increasing the gross domestic product and having inflation can mean an economy that is expanding, not retracting. Anyone who has stocks in their investment portfolio usually realizes that without an increase in the GDP, companies can not make bigger profits, which is detrimental to their stock performance. An inflation rate of two to three percent, and that is very stable, is critical for a healthy economy. One way that inflation benefits the economy during a recession is that it affects wages. American workers do not take wage cuts usually, but inflation can actually reduce wages once inflation is taken into consideration. Employers usually give raises, sometimes as a cost of living adjustment, or COLA, which takes inflation into consideration and adjusts the real wage to account for it. If a COLA or raise is two percent of a wage, but inflation is five percent, the worker is taking a three percent pay cut even though it appears they are making more money, because the value of a dollar is less.

Some economists and financial experts believe in a business cycles theory. These theories are based on observations through history that there are regular patterns to economic and financial problems that occur in waves, and this cycle of patterns is referred to as the business cycle. Some investors and advisors believe that this theory allows the market to be predicted somewhat, although they do not believe that this is guaranteed completely. Many investors, advisors, and experts do not believe in the business cycles theory though, because normally a crisis in the financial sector or the economy is brought on by other factors. The crisis is rarely brought on by the market or business sector, rather the crisis affects these areas.

Because of the current lack of inflation, with an interest rate in America as close to zero as it has been in a long time, the stock market is extremely volatile, and many investors have lost most or all of their investment capital. The crisis has hit across almost all sectors of the economy, but it started with the housing and subprime markets, and spread from there. The stagnant economy and lack of inflation has hurt investors and financial institutions, and a small steady rate of inflation could stimulate the economy so that it starts to grow again, instead of shrinking. This may be one of the few options that can help revive an economy that is falling lower and lower.

The information supplied in this article is not to be considered as medical advice and is for educational purposes only.