There are many reasons why economists have found it difficult in finding the source of inflation. Among the reasons include the fact that they have not given the correct definition of the word. Many people believe that inflation means rising prices and therefore if that is not happening, then there is no inflation. However, it is imperative to note that the rising of prices is one of the main symptoms of inflation. A correct definition of inflation should narrow down to the money supply. So if a country is experiencing inflation, it does not mean that the prices are inflated but instead the money supply.
There it is vital to appreciate the fact that changes in the money supply causes will most definitely affect the prices of commodities. The spending capacity of people usually reduces during the recession period. In such a scenario, the demand for commodities and services falls leading to a subsequent reduction in the prices. It is also critical to note that an expanding money supply counterbalances the demand and supply forces by reducing the value of the currency. Therefore, whenever there is inflation during the recession, prices might tend to go up, remain flat. Or even fall less compared to what they would have been without inflation.
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During the recession period, prices should fall so that rebalancing should occur in the economy. Some economists feel that a reduction in the prices is a factor that destructs the demand force. However, they should remember that it also increases the probability of spending. The government usually counters recession through the creation of money. However, if the government continues further with this process, there can arise a situation where inflation and reception co-occur leading a condition known as stagflation. It is also important to appreciate that unemployment and inflation can coexist when because when people lose their jobs, both demands and prices fall too.
