Stagflation - Explained
What is Stagflation?
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What is Stagflation?
Stagflation is a combination of Inflation and Stagnant Economic Growth. This slow pace of economic growth is further hampered by rise in inflation, prices, and unemployment. As GDP goes down and inflation goes up, an economy reaches a state of Stagflation. Academics differ in their opinion on how this state comes to be and theres a lack of conclusive evidence that defines the parameters of the problem.
Back to:ECONOMIC ANALYSIS & MONETARY POLICY
How does Stagflation Work?
Stagflation is a double edged sword that makes it harder for governments to deal with it. Measures to counter inflation have an adverse effect on economic growth thereby worsening one part of the problem to address the other. Conversely, policies aimed at reducing unemployment and give a boost to the economy worsen the situation with a further rise in inflation. Stagflation is a state wherein the high unemployment rates lead to decline in spending, even as the price of goods increases further affecting spending negatively. It is an unnatural phenomenon since lull in economic growth isnt conducive to rise in inflation. Weak economic growth arrests inflation, but Stagflation defies this principle. Iain Macleod first used the term Stagflation while speaking in the House of Commons in the United Kingdom in 1960. He was speaking of inflation on the one hand and stagnant growth on the other hand and combined the terms. The economic recession period that haunted the United States economy in the 1970s is usually described as a period of Stagflation. Development of the Misery Index that measures the general public feeling during tough economic times was a direct result of the emergence of the term Stagflation.
Theories on the Causes of Stagflation
Stagflation is explained by two significant theories.
- Stagflation theory that posits that the rising cost of oil is the culprit behind the rise in inflation and cost of goods as the manufacturing and transportation sectors are also adversely affected.
- Economic theory that posits that poor economic policies eventually lead to the phenomenon of Stagflation. Examples of such policies include excessive printing of currency notes while no checks and balances are in place to keep inflation low.
Examples of Stagflation
The economic phase in the United States between 1973 to 1975 saw successive quarters of increasing inflation while the GDP growth was on a steady decline. By May of 1975, unemployment rates were at 9% with inflation tripling in pace. This period of Stagflation lasted a few years. While some economists lay the blame on OPEC's embargo of oil on Western countries, driving up production and transportation costs, others cite President Nixons poor economic policies as the reason behind this lean phase. A consensus is yet to be arrived at.
- Supply-Side Economics
- Say's Law
- Laffer Curve
- Neo-Classical Economics
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- Keynesian Economics
- Keynes' Law
- Keynesian Analysis
- Demand Side Theory
- Market Forces
- Aggregate demand
- Aggregate Demand Curve (and shifts)
- Aggregate supply
- Aggregate Supply Curve (and Shifts)
- Aggregate Demand / Aggregate Supply Models
- Potential GDP
- Aggregate Supply and Demand Equilibrium
- Aggregate Supply and Aggregate Demand in Macroeconomics and Microeconomics
- Input-Output Model
- Growth and Recessions in the Aggregate Demand - Aggregate Supply Model
- Unemployment in the Aggregate Demand - Aggregate Supply Model
- Inflation in the Aggregate Demand - Aggregate Supply Model
- Keynesian, Intermediate, and Neoclassical Zones