The triggers of a recession
A recession is the consequence of an economically successful phase. A boom serves as the starting point. People in a country earn well and consume a lot. Prices of goods and services may increase due to increased demand. In addition, wages for workers are high during the boom, which also makes the production of goods more expensive. These increased costs are passed on to consumers.
If the demand for goods and services remains high, supply bottlenecks can occur. However, these bottlenecks can also be triggered by other circumstances, such as political decisions, scarcity of raw materials or wars. Your result: ever-increasing prices for consumers.
When prices go up, consumers need more money to finance their everyday lives. However, wages reach their upper limit after some time. Money slowly loses purchasing power in this way and a inflation.
Tip: Find out how consumers and investors should behave during inflation in this Rategber article.
Inflation forces consumers to save more because they can afford less. The willingness to consume is gradually declining, leading to stagnating economic growth. To combat inflation, the amount of money in circulation must be limited. The most effective remedy against this is raising the key interest rate to make credit less attractive. Both consumers and companies invest less money. However, if this situation persists, gross domestic product will shrink and a country will slip into recession. Inflation can accordingly herald a recession and both economic phenomena are closely related.