Stagflation: Is It Economic Armageddon?

Break out the flared jeans! This one's a throwback to the Seventies!

• Inflation is a rise in the general price level of goods and services in an economy. We haven't seen much high inflation in recent decades, but we are now! Still, when it appears, the effects can be devastating.
• Inflation is most commonly measured by the increase in the Consumer Price Index (CPI). But it would be better to think of it as a decrease in the amount of stuff you can buy with your money. 
• Stagflation is a set of circumstances where inflation is high, but economic output remains low (or negative), and unemployment worsens/remains high.

Stagflation is a set of circumstances where inflation is high, but economic output remains low (or negative), and unemployment worsens/remains high. This situation creates issues for policymakers, as traditional policies that reduce inflation (such as raising interest rates) may do even more harm by crushing what little remains of economic growth. 

What Causes Stagflation?

Like inflation in general, there is no one answer for the cause of stagflation. However, there are two leading theories: supply shock and substandard economy policies.

Supply Shock

This theory suggests that the cause of stagflation is when an economy is presented with a sudden change in the supply of a commodity or service (e.g. oil or the number of available tanker drivers). This causes prices or wages to surge, therefore increasing the costs of production for businesses, lowering profits and holding back economic growth.

Substandard Economic Policies

This theory suggests that stagflation arises when potentially harmful policies are implemented, such as harsh market regulation, during an otherwise inflationary period.

Examples

The most notable example of stagflation was in the 1970s. In the US, this was stated as being caused by a combination of factors, including irresponsible economic policy in the decades building up to the 1970s, plus the OPEC oil embargo of 1973, which caused production costs to soar even as aggregate demand was collapsing.

STAGFLATION BASICS. COMPLETED. ✅

Sources:

1. https://www.vox.com/2014/7/24/18080392/inflation-definition-and-explanation
2. https://corporatefinanceinstitute.com/resources/knowledge/economics/stagflation/ 
3. Header photo by NYPL on Unsplash