What Is Stagflation?
Stagflation is an amalgamation of the words stagnation and inflation. It describes an economic condition characterized by slow growth and rising unemployment, otherwise known as economic stagnation, mixed with rising prices, otherwise known as inflation.
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The term stagflation was coined in 1965 when Iain Macleod in a speech said: "We now have the worst of both worlds — not just inflation on the one side or stagnation on the other, but both of them together. We have a sort of 'stagflation' situation and history in modern terms is indeed being made."
While stagflation technically refers to a period of rising unemployment accompanied by sharp price increases, economists have recently used the term more broadly to refer to a period when inflation stays significantly higher than the Federal Reserve's target and the economy slows or contracts. Experts caution that a prolonged period of rising costs and slow job growth might be disastrous even if unemployment doesn't rise.
Experts are divided on the causes of stagflation. Each economics school offers a unique perspective on the subject's history. Two basic hypotheses, however, can be derived: supply shock and poor economic policies.
According to the supply shock theory, stagflation happens when an economy experiences a sharp rise or fall in the supply of a good or service, such as a sharp rise in the price of oil. As a result, production becomes more expensive and less profitable, which slows economic growth.
A second theory holds that poor economic policies may be the cause of stagflation. For instance, the government may adopt a measure that damages certain sectors of the economy while expanding the money supply too quickly. The implementation of these policies at the same time may result in slower economic development and higher inflation.
Sadly, there is no definitive solution to stagflation. It is expensive and challenging to end from a social and financial perspective.
Narrated by: Kashieu
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