Quote:
Originally Posted by randolph
Isn't it true that according to economic theory, prices should decline during a recession?
Humm, I wonder what's going on.  |
It is ONLY a theory that prices SHOULD go down in a recession. Reality has shown that it doesn't necessarily work that way.
Prices change because of fluctuations in supply of and demand for goods as well as supply of and demand for money. Most people tend to forget about the money issue. The theory is based on the assumption that greater supply and less demand of GOODS caused by a recession will lead to lower prices.
Keep in mind that the money supply is always expanding, which automatically leads to a continuous inflationary pressure -- which may or may not rear its ugly head as actual inflation in the economy, depending on other circumstances. If wages remain low and economic growth is stagnant or declining, as in a recession, the pressure on manufacturers and sellers of goods with respect to prices may not necessarily work as one would expect. Depending on the particularities of the recession at any given moment, some prices may be increased to compensate for the shortfall in overall sales of goods. That equals inflation.