The recent event of the coronavirus pandemic and further the Russia Ukraine- war has resulted in an increase in inflation numbers and has started off the debate on how to tackle this exacerbating inflation. The main problem with tackling inflation is that it hurts the growth prospects of the nation, and if you look at the numbers, the world’s growth is already hovering around 3%, and anything below 3% is referred to as a recession. Economists around the world are in a dilemma about what to treat first – inflation or recession.

To understand whether we should tackle inflation or recession, we should first understand the trade-off between them, and for that, we need to have an idea of what exactly is inflation and recession. Inflation is referred to as a necessary evil, and a certain level of static inflation is encouraged by the markets. But when this inflation goes beyond a bearable range, it starts eroding the wealth of Individuals. Also, as prices rise, people have lesser money in their pockets, resulting in a reduction in their savings and hence hurting the future prospects of investment in the economy. Inflation is either cost-push or demand-pull, and one of the measures that central banks take to address inflation is by adopting a more hawkish monetary policy where lending is expensive, and the central bank sucks excessive liquidity from the market hence reducing the overall demand in the economy. Though this is more helpful in tackling demand-pull inflation, it also has spillover effects on cost-push inflation. The one caveat with this hawkish monetary policy is that it impedes the growth trajectory. With the economic slowdown caused during the pandemic, if the central bank again adopts a dearer monetary policy, it can push the economy into recession.

Source: MacroTrends; Compilation and Visualization By Arthashastra Intelligence.

This trade-off between inflation and recession initiates a debate about what one should choose; though we all know the potential threat that recession possesses but we should fear inflation more. Firstly, inflation, as mentioned above, erodes the value of wealth. Rs 100 today will be worth less tomorrow, and this spiralling inflation keeps depreciating the value of money. As a result, such price rises make it difficult and uncertain for businesses. As forecasting becomes unpredictable after a point, businesses tend to make poor investment choices due to ambiguous scenarios. Secondly, inflation benefits those who borrow more e.g. the government. The borrower can borrow money today and repay a lower amount later due to the time value of money and depreciation due to inflation. In contrast, inflation is very bad for those who save as their money is losing its value each day. They get lesser in value for their returns. This, hence, discourages those who save, which negatively impacts the economy as we need more savings as these lead to higher investments, which boosts the country`s growth. Rising inflation also impacts the wage contracts of different employees as it corrodes the real money that they`re earning.

Inflation hinders the signalling behaviour of individuals and firms. Businesses and individuals signal prices in the market to reflect the quality and ROI; however, increasing inflation makes this signalling blurry making it difficult for a rational investor. Signalling of prices is also used to address the demand-supply wedge, and this again becomes hazy due to inflation as it becomes difficult to identify which prices are rising and/or falling. We`ve all heard the phrase regarding inflation fuelling itself; inflation is hard to curb. As prices rise, the inflation expectations of consumers change. These expectations of inflation then further fuel the inflation as consumers expect prices to rise further in the future. As a result, consumer behaviour is to buy feverishly, which increases the pressure exerted on prices.

Therefore, however bad a recession may sound, it is of utmost importance to tackle the necessary evil, inflation.