Stagflation is an economic phase marked by very high inflation, there is almost an absence of growth or growth is negligible, and there is unemployment. All these three aspects must have occurred persistently for it to be called stagflation.
Stagflation was prevalent n the 1970s and 1980s. It was seen that whenever the rate of unemployment was high, inflation was low, and when the unemployment rate was low, inflation decreased. In most of the economies around the world, during the 1970s and 1980s, stagflation was prevalent. More about what causes it in the paragraphs that follow.
What is stagflation caused by?
Several economic theories debate about the probable causes of stagflation. Check out a few of them below-the
-
Supply Shock
According to this theory, it results when there is an abrupt drop in the availability of certain services or a commodity. This causes the cost of that commodity or service to escalate, which decreases the profit margins and retards economic growth.
-
When monetary policy is bad
This policy advocate that it stagflation whenever the monetary policy is not sound. While central banks and governments worldwide try to mend and regulate the economy, they end up making wrong choices. One stagflation example was when the United States introduced the Employment Act of 1946, which led to inflation and adversely impacted employment and economic growth.
-
Cost-Push
The so-called cost-push inflation theory sees supply-side inflation as the main driver that causes stagflation. Under such circumstances, a rise in costs leads to unemployment since profit margins get reduced, and such a scenario usually causes stagflation. Tariffs, wage increases, and shortfall of labor also lead to stagflation.
-
Differential Accumulation
A theory that Shimshon Bichler and Jonathan Nitzan have propounded advocates that a co-relation exists between stagflation, acquisitions, and mergers. According to this theory, just as there is a shortage of supply of a commodity causes the price to rise, it leads to concentration of power and results in a limited supply of commodities.
Consequences of stagflation
The outcome of stagflation can be summarized as follows-
- It adversely impacts people’s livelihood because it impacts the purchasing power of the people, and many find it difficult even to make ends meet.
- For the employed, this economic phenomenon could lead to job loss, lower wages, and negatively impact consumer confidence.
- The higher input prices and weaker sales results in lower profit margins.
- If stagflation lasts for a longer time, it can lead to many companies going bankrupt, thereby impacting purchasing power of consumers and shattering their confidence.
- Since different national policies can lead to different results, likely, they might also conflict with the interest of the economy at times.
How will you tame stagflation?
Stagflation can be minimized, or at least the effects can be reduced by the following –
- Monetarist measures
- Altering supply-side crisis
- By controlling wages diligently
- Neoclassical responses
The above are just a few of them. With changing governments, policies vary as well depending on the prevailing condition of the economy and the best solution to implement thereby.
