What Is Stagflation and Why Is It Concerning?
The word stagflation was first introduced when British politician Iain Macleod spoke at the House of Commons in 1965 to address a slow economic and low employment rate situation.
Slower economic growth, increased unemployment, and higher prices make up stagflation. According to economic theory, these things shouldn’t be combined. Prices shouldn’t increase as people’s disposable income decreases.
The misery index explains the effects of stagflation whereby the unemployment and inflation rates were tracked to identify their effects on people’s perception of happiness. This index is devised based on the idea that since employment rates and purchasing power are directly correlated with one’s well-being, their collective value indicates economic wellness and health.
The events following the 1970s financial crisis have shown an inclination by people to grow interested in precious metals exchange. Since currency is volatile and loses its value to inflation, commodities like gold and silver are attractive investment avenues for people looking to preserve their wealth.
This post will discuss what stagflation is, what causes it, and if there is a cure for it. Keep reading to find out how to stay ahead of wealth depletion in the wake of inflation in an economy.
Stagflation is a sticky situation where a country’s economic cycle experiences slow growth accompanied by an unusually high unemployment rate and inflation. This trouble triangle has left economists stuck in a rut, as trying to fix one factor often results in the acceleration of others.
This phenomenon has been around quite frequently since the oil and financial crisis in the 1970s. As of 2022, many experts predict global stagflation in the making as a consequence of a global consumption shift due to the pandemic and major instances like the recent war in Ukraine. The great depression is another great example of such instances of stagflation and the poor well-being of a nation.
Although stagflation was believed to be impossible by policymakers and economists, financial events in the late 20th century have shown that every recession session in the U.S. is followed by inflation as tracked by high consumer price levels. This phenomenon has also caused paper money to lose value rapidly and forced people to consider investing in precious metal commodities.
Inflation Versus Stagflation
Although stagflation and inflation have some major differences, they are often confused and used interchangeably. Let’s look at what the two terms exactly mean.
1. Inflation
Inflation is characterized by a steady increase in prices over a long period. When all the goods produced and services provided in a certain economy consistently rise, an increase in the unemployment rate is underway that could lead to a recession. In such cases, attempts to stimulate the financial system fails, creating economic shocks.
2. Stagflation
Stagflation is three-pronged. It starts when inflation causes a recession and leads to increased unemployment. In this equation, unemployment and inflation are inversely related to economic growth (recession).
In simpler words, inflation is when an economy’s money supply rate is greater than the workforce it takes to produce goods and services. When this situation escalates, the economy is said to be in a state of stagflation. Let’s look at a few causes of stagflation.
Causes Of Stagflation
Stagflation is a consequence of unbalanced fiscal and monetary policies. While many economists are still trying to figure out what causes stagflation, here are a few common factors causing it:
1. Oil Price Shocks
A sudden increase in oil prices decreases an economy’s productive capability. The oil crisis in the 1970s is a prime example of a stagflation situation; an increase in fuel prices is directly proportional to consumer prices which inversely affects unemployment.
2. Poor Economic Policies
Harsh policy changes affect the fluidity of markets, the productivity of labor, and the goods produced. With all factors combined, economies get caught in sticky situations and struggle to get out.
3. Depreciation of Gold
Most currencies have an underlying asset that decides their value. In the U.S., gold was removed as a deciding factor for the currency during Nixon’s reign for a more stable currency rate. This gave rise to fiat economies all around the world to control currency devaluation.
Can Stagflation Be Cured?
So far, there has been no definitive cure for stagnation. Economists worldwide struggle to find a balance between the three factors that result in stagnation but have failed to devise a foolproof strategy. As per professional consensus, achieving high levels of labor productivity can lead to higher economic growth without increasing inflation, but the theory lacks practicality.
Till there is solid proof and evidence to move forward, policymakers proactively work to control stagflation in any economy by trying to attain a healthy mix between its causing factors.
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