Stagflation vs recession: How do they differ & which is worse?

Stagflation vs recession: How do they differ & which is worse?

Stagflation vs recession: Both recession and stagflation are negative economic scenarios but the stagflation is worse than recession. Because during a stagflation, both inflation and unemployment are very high.

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What is Stagflation? – With examples

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What is stagflation?

Stagflation is the economic situation that higher inflation, slower economic growth (stagnation), and increasing unemployment all happen simultaneously.

What is stagflation

Stagflation can be recognized as an economic consequence that happens as a result of stagnation. Because, when an economy is in stagnation, the government get action to decrease unemployment and increase economic growth. In other words, the government applies expansionary economic policies (Ex: expansionary fiscal policy, expansionary monetary policy). Sometimes these actions do not decrease unemployment but increase the inflation of the economy by reducing the purchasing power of consumers.

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As economists, we do not have an exact mathematical formula to calculate stagflation. Most economists accept that it would not just be one or two quarters, but a continuous period of high inflation and slow growth.

Stagflation can be presented using the Phillips curve. During a stagflation, Philips curve shift to the rightward. So simultaneously unemployment and inflation increase.

stagflation graph

Stagflation example – great inflation

Firstly, the term of stagflation was used in the mid of 1960 in the British Parliament when the economy was suffering from higher inflation and higher unemployment simultaneously.

Most notable period of the Stagflation in US history was occurred during the 1970s. Because of the factors such as oil crisis (an excellent illustration of a supply/demand issue is the oil crisis that caused supplies to plunge), inflation increased more than 7 percent. A recession with minus 3.2% GDP growth and a peak unemployment rate of 9% in May 1975 accompanied the hike.

We should note that in the US, during every recession, there was inflation up to some extent. In 1980, there was a very brief recession that resulted in a 7.8% unemployment rate, a 2.2% GDP decrease, and a 13% inflation rate. A year later, there was another recession, with unemployment rising to 10.8% and inflation running from 7% to 10%. When it was concerned about the great recession that happened from 2007 to 2009, there was higher inflation until late 2008. Inflation remained higher than average inflation, and unemployment was at double digits.

What is the recession? 

A recession means a period of negative or very weak economic growth.

It is very important to define recession technically. When we technically define the recession, “it is the period of minimum two consecutive quarters of negative economic growth rate”. Here usually economic growth is determined by the growth of the Gross Domestic Product (GDP).

But some well-reputed organizations have defined the recession differently. As an example, according to the National Bureau of Economic Research (NBER), recession means a period of a minimum of more than a few consecutive months with significant economic decline.

When an economy with a recession, its aggregate production is declined or increases very slowly, and unemployment is increased significantly. Because the output level of the business organizations is decreased and then they have to lay off employees. As result of losing employment, people reduce their private consumption expenditures such as buying a car, or house.

Business cycle

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Recession example – great recession

Financial Crisis in 2008 which is a recession that happened in the United States. Financial Crisis in 2008 is called a subprime mortgage crisis also (Duignan, 2019). It affected all elements of the financial system in the countries. It has happened in the Housing Market in the United States and it was the main cause for this crisis.

In 2001, the Federal Reserve which is the Central Bank of the United States anticipated a mild recession and reduced interest rates for that. After that, Banks were able to lend to customers at a lower interest rate and demand for credit was increased. Then customers are motivated to purchase durable goods which are houses, appliances, and automobiles. It was most affected by the Housing Scheme and home prices increase as a result of that. This is the Housing Bubble in the United States in 2008 and it was the reason for having the financial crisis in 2008.

Stagflation vs recession: What are the differences?

1. Definition

Stagflation is the economic situation that higher inflation, slower economic growth (stagnation), and increasing unemployment all happen simultaneously.

Recession means a period of negative or very weak economic growth.

2. Technical measurement

Most economists accept that stagflation would not just be one or two quarters, but a continuous period of high inflation and slow growth.

Recession is the period of minimum two consecutive quarters of negative economic growth rate. Here usually economic growth is determined by the growth of the Gross Domestic Product (GDP).

3. Causes

According to the economists, there are two major types of causes of stagflation. They are, supply-side shocks and poor economic policies. These two main causes be occurred independently or can be occurred together. To read more, kindly click on “What causes stagflation?

A recession can be occurred because of trade wars, interest rate rise, fiscal austerity, asset price fall, and a shift in consumer behavior.

4. Can be within business cycle?

Stagflation is something that cannot be considered normal, does not occur during the typical business cycle, and is the results of unusual conditions.

Recessions are part of the economic cycle. There are 4 phases of the business cycle. They are expansion, peak, recession, and trough. Among them, the recession is the period where the economy moves from a peak to a trough.

5. Inflation

There is a higher inflation throughout a stagflation. High inflation means increasing the general price level of goods and services rapidly than increasing the nominal wages of the people. High inflation reduces the purchasing power of money. So, during stagflation, people can buy less amount of goods and services. From 1960s to 1980s, inflation of US has risen from 1 percent to 14 percent.

During a recession, the purchasing power of the people is decreasing and people decrease the demand for goods and services. So, inflation is decreasing.

6. Unemployment

There is a higher unemployment throughout a stagflation. High unemployment means an increasing number of unemployed individuals. When there is a higher number of jobless people, they cannot spend money to buy goods and services. So, it is difficult to stimulate the economy. From 1960s to 1980s, unemployment of US has risen from 3.4 percent to 10.8 percent.

The companies lay off employees as a result of decreasing demand for their products. So, unemployment in the economy is increasing in a recession.

7. Economic growth

During the stagflation period, economy is growing very slowly or negatively growing. An economy that has limited economic activity is one that is rarely expanding. Low economic activity is caused by high unemployment rates, and high inflation, as well as a number of other variables like a decline in consumer confidence and a drop in factory orders. But the GDP decrease period can differ from one stagflation period to another stagflation period. During the US stagflation of 1970s, GDP shrank during some years but grew during other years.

During a recession, GDP is decreasing. Because private consumption, exports, and investment in the country are decreasing. During the Great Recession of 2007 to 2009, GDP fell by more than 4%.

8. Duration

A stagflation can last during a long period and it is hard to eliminate the stagflation. Stagflation continued in the United States for the most of the 1970s, only to end in the early 1980s. But according to some economists, this recession was started in 1960s.

A recession lasts between 2 to 18 months. Usually, recessions are over within a year. Recessions in the United States have lasted an average of ten months since 1945, ranging from two months to 18 months for the longest. Even while recessions are often short-lived, it can take a while for the economy to fully recover and reach its pre-recession levels.

9. Frequency

Stagflations are very rare. During 1970s, there was a lengthy period of stagflation.

A recession is a phase of the business cycle. Since World War II, there have been 13 economic recessions. There have been 34 recessions since 1854.

Summery: Difference between stagflation and recession

 StagflationRecession
DefinitionStagflation is the economic situation that higher inflation, slower economic growth (stagnation), and increasing unemployment all happen simultaneously.Recession means a period of negative or very weak economic growth.  
Technical measurementStagflation would not just be one or two quarters, but a continuous period of high inflation and slow growth.Recession is the period of minimum two consecutive quarters of negative economic growth rate.
Causes  According to the economists, there are two major types of causes of stagflation. They are, supply-side shocks and poor economic policies.A recession can be occurred because of trade wars, interest rate rise, fiscal austerity, asset price fall, and a shift in consumer behaviour.  
Can be in the business cycle?Stagflation is something that cannot be considered normal, does not occur during the typical business cycle, and is the results of unusual conditions.Recessions are part of the economic cycle. The recession is the period where the economy moves from a peak to a trough.
InflationThere is a higher inflation throughout a stagflation. High inflation means increasing the general price level of goods and services rapidly than increasing the nominal wages of the people.During a recession, the purchasing power of the people is decreasing and people decrease the demand for goods and services. So, inflation is decreasing.  
UnemploymentThere is a higher unemployment throughout a stagflation.There is a higher unemployment throughout a recession.
Economic growthDuring the stagflation period, economy is growing very slowly or negatively growing.During a recession, GDP is decreasing.
DurationA stagflation can last during a long period and it is hard to eliminate the stagflation.A recession lasts between 2 to 18 months. Usually, recessions are over within a year.
FrequencyStagflations are very rare. During 1970s, there was a lengthy period of stagflation.A recession is a phase of the business cycle. Since World War II, there have been 13 economic recessions.

Is stagflation worse  than recession?

Both recession and stagflation are negative economic scenarios but the stagflation is worse than recession.

Recessions can be viewed as brief falls in economic growth, whereas stagflation is a persistent issue that is very challenging to reverse once it has begun.

A recession lasts between 2 to 18 months. Usually, recessions are over within a year. Recessions in the United States have lasted an average of ten months since 1945, ranging from two months to 18 months for the longest. Even while recessions are often short-lived, it can take a while for the economy to fully recover and reach its pre-recession levels.

A stagflation can last during a long period and it is hard to eliminate the stagflation. Stagflation continued in the United States for the most of the 1970s, only to end in the early 1980s. But according to some economists, this recession was started in 1960s.

Recessions are part of the economic cycle. The recession is the period where the economy moves from a peak to a trough. But the stagflation is something that cannot be considered normal, does not occur during the typical business cycle, and is the results of unusual conditions.

 Central governments typically have more tools in their toolbox to correct a recession than they do to fight stagflation.

Overall, stagflation is significantly more harmful than a recession in terms of its length and intensity. Stagflation gradually develops into a self-perpetuating issue. As inflation rises, this puts pressure on business profit margins and significantly lowers consumer purchasing power. High unemployment results from slow economic growth, which drives further GDP decreases. 

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