Stagflation is derived from two words stagnation and inflation. Stagflation is an economic term used to describe a condition that describes slow growth, high unemployment and rise in prices of goods and services.
In other words, stagflation is a combination of three negatives: slower economic growth, higher unemployment and high inflation.
Inflation refers to a sustained increase in prices of all goods and services in an economy over time. Inflation can occur due to many factors. One of the most impact factors is when the money supply grows faster than the rate at which goods and services are products in a country.
In 1965, British politician Lain Macleod used the term Stagflation to describe the time of economic stress in the United kingdom. He describes the effects of inflation and stagnation as a “stagflation situation”.
Many economists argue that the combination of slower economic growth, higher unemployment, and higher prices isn’t supposed to occur in the logic of economics. They argue that unemployment fell as inflation rose, and rose when inflation fell. Therefore, this combination is not possible. However, in the 1970s the United States faced stagflation due to the oil crisis.
Stagflation is harmful to the economy. For end consumers it means people are earning less and spending more on almost everything.
When end consumers spend less due to higher costs, consumer spending slows down and corporate revenue decreases. This affects the overall economic activity, resulting in slow growth and unemployment.
As discussed above, stagflation occurs when there is a high inflation, higher unemployment and decrease in economic activity.
Here are few factors that may cause stagflation;
- Poor fiscal policy and monetary policy decisions.
- Increase in cost of oil and energy prices and decrease in economic productivity.
- Reaction of consumers and producers to the economic behavior such as rising prices, monetary policy changes and unemployment may create stagflation.
Economists closely watch the trends in growth, rise in prices, unemployment and other measures to assess if stagflation will be triggered. If the price rise and economic slowdown is temporary, economists don’t fear stagflation.
