Inflation vs Recession: Impact on Banking & Investments

Inflation vs recession are two economic terms with very different meanings that can have very negative impacts on banking, investments, and the economy.

In this article, we’ll break down both inflation and recession, discuss how they can impact your finances, and answer common questions we receive on the topic.

This article is part of our series on bank account opening in different countries, which you can access for free following the link above.

Feel free to use the table of contents to jump ahead to the sections most relevant to you.

Table of Contents

  1. Inflation vs Recession
  2. Do Interest Rates Rise With Inflation?
  3. Frequently Asked Questions
  4. Do You Want Help Opening Bank Accounts?

Inflation vs Recession

The main difference between inflation and a recession is that inflation refers to a period of sustained increases in the price of goods and services in an economy while a recession refers to a period of sharp decline in the gross domestic product and employment in an economy.

In other words, inflation and recession refer to two very different, albeit very important situations that can impact an economy. Here’s a look at what inflation and recession mean and the impact they can have.


Inflation generally occurs during periods of increasing money supply, decreasing supply of goods and services, or sharp increases in demand. In short, inflation refers to how prices react when supply cannot meet demand.

As prices continue to rise, consumer purchasing power continues to fall because wages are unable to increase at the same pace. This generally results in a decrease in consumer spending, which can (among other things) be a catalyst for periods of economic contraction, including recessions.


Recessions refer to periods of economic contraction, typically characterized by a combination of variables including declining GDP, decreasing employment (increasing unemployment), and declining consumer spending.

As mentioned, periods of sustained price increases (inflation) can be one of the factors that lead to a recession. However, inflation is not the only contributing factor. Recessions can also be caused by a sharp decline in demand for goods and services, a sharp rise in interest rates, or a significant drop in investment activity.

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Do Interest Rates Rise With Inflation?

Yes, interest rates generally rise with inflation. The reason for this is that interest rates are one of the mechanisms central banks use to curb the demand for credit in an economy.

By increasing interest rates, central bankers hope to discourage borrowing. This is because the central bank rate directly impacts the cost of credit for the end consumer. So, the thinking is that consumers will not spend as much money as interest rates increase.

The hope is that by reducing consumer spending (by increasing the borrowing cost), economic activity will decline and inflation subside.

Frequently Asked Questions

Below are a few of the most common questions we receive from people looking into inflation vs recession. If you have further questions you would like to ask our team, don’t hesitate to get in touch.

Does Inflation Cause a Recession?

Inflation can be one of the contributing factors that cause a recession. The reason for this is that inflation causes higher prices, and higher prices typically reduce consumer spending. Additionally, inflation is usually followed closely by increasing interest rates, which increase the cost of borrowing and also reduce consumer spending. These factors can contribute to reduced economic activity, which may lead to a recession.

What Is Worse Than Recession?

There are several economic scenarios that are considered worse than a recession, including depression and hyperinflation. More specifically, while recession typically refers to an economic downturn lasting several quarters, a depression refers to a prolonged period of severe economic downturn, widespread poverty, and mass unemployment. On the other hand, hyperinflation refers to extreme periods of inflation where prices accelerate dramatically, devaluing a nation’s currency and devastating the economy.

Do Things Get Cheaper In a Recession?

During a recession, prices do tend to get cheaper for consumer goods. There are several reasons for this, including decreased demand due to rising unemployment, which forces providers of goods and services to reduce the prices they charge.

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GlobalBanks Team
GlobalBanks Team

The GlobalBanks editorial team comprises a group of subject-matter experts from across the banking world, including former bankers, analysts, investors, and entrepreneurs. All have in-depth knowledge and experience in various aspects of international banking. In particular, they have expertise in banking for foreigners, non-residents, and both foreign and offshore companies.

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