Should Prices go down During Recession?
“In a recession the demand for goods witnesses a decline and as a result the supply of commodities goes up. As per the law of demand and supply the prices should fall. But this does not happen in actuality.”
We all are facing very tough times, economically speaking. Sometimes, it does occur in our minds that when economy is at a low why prices don’t witness a decline? Very reasonable question. Let’s explore it.Let’s first consider the case of a surge in the economy. What all does happen during a surge? The first thing to happen is that the demand exceeds the supply of goods. It’s because people have ample money to purchase goods of their liking. As a result an increase in prices is witnessed.
A recession is just the opposite of a surge. In a recession the demand for goods witnesses a decline and as a result the supply of commodities goes up. As per the law of demand and supply the prices should fall. But this rarely happens.
The same thing comes to fore when we scrutinize the inflation rate during a surge and a recession. Theoretically, inflation should be high during a surge and low in a recession. But all of us are testimony to the fact that recessions do observe positive inflation rates.
The straight answer to this anomaly is that our world is too complex than what we usually believe it to be. The real market forces and money factor are very complex to be formulated into maxims and adages. After all, science that is considered to be the most exact field of study witnesses regular failures of even the most stringent of theories.
In a recession, no one can curb the money supply. It is still in a growing stage. As the result the inflation ceases to come down and we witness high to very high prices even during a recession.
This is just one way to look at things. There may be many other ways possible. For example, the money supply is also of various types and history tells us that during even the most stringent periods of recessions, money supply continued to rise for some categories of money.
The division of money into different categories is not agreed upon by all the economists and therefore we safely can say that the increase of money supply during a recession is a prominent factor that leads to an increase in prices.
Author - DeeKay
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