Cost-push Inflation

Cost-push Inflation. Mounting oil, energy and food prices have led to an increase in the costs of production. This shifts the aggregate supply curve to the left and leaves the typical consumer with less to spend. What are the differences between the UK recessions and how long does a recession last? Classical economists argue that any decrease in real GDP will only last for the short term. This is because they believe that markets will adjust so the problem will only remain temporary.

However, this was criticised by John Maynard Keynes, as he said that the depression in the 1930s shows that markets do not amend automatically. The early 1980s recession was primarily caused by an excessive contractionary monetary policy to control high inflation. At the time, there was high demand and an inflation rate of 27%. This led the government to utilise deflationary strategies for both monetary and fiscal policies. There were higher interest rates and taxation which drastically reduced aggregate demand.

Government spending was decreased, partly persuaded by Monetarists, who felt that lower government borrowing was needed. Owing to the high value of the pound, imports were relatively cheap whereas exports were expensive, so it had a severe effect for British manufacturing. The recession lasted about 6-7 quarters, although unemployment was around 3 million for another 5 years. 9 The early 1990s recession was a classic scenario of boom and bust.

Due to the Lawson Boom, rapid and unsustainable economic growth had caused the economy to overheat. This created high inflation, which was tacked by the government's deflationary measures. The government wanted to maintain a strong currency so they chose to join the Exchange Rate Mechanism. This engendered high interest rates of 15%, causing a big drop in AD. The recession lasted just over a year (5 quarters), prolonged by the government's persistence to stay in the ERM, only to it leave later.

In 2008-2009 much of the industrialised world entered into a deep recession, sparked by a financial crisis that had its origins in reckless lending practices involving the origination and distribution of mortgage debt in the USA. 10 Nonetheless, we still find ourselves questioning how long this current recession will last. There is no obvious answer and recessions can vary in time. It depends on how they were brought about, what actions the government and consumers take, and how they respond.

But it must be hastily added that there are approximately 3 million more people of working age this time than last, and 4.5 million more than in the early 1980s recession. And regardless of all the media headlines portraying a pessimistic economy, it is worth bearing in mind that many people do actually keep their jobs. But whilst unemployment statistics may be relatively favourable, the financial sector has been hit hard. People are more likely to be directly affected by rising costs of living. The rise in food and energy prices is hard to ignore; it is estimated that many consumers could be worse off this year because prices are rising faster than wages. This is what people will notice.

However, in light of recent data, deflation occurred in May 2009 for the first time in nearly five decades, as prices measured by the retail price index (RPI) were lower than the same time a year ago. Nevertheless, the road to recovery has overruled fears over inflation. 19 Weighing up both the plusses and minuses of a recession, it seems to cause more harm than good, and it is unnecessary to enhance economic efficiency. Instead, the long term future of an economy should be aided through stable growth, which evades the extreme fluctuations of boom and bust economic cycles.