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

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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.

According to the above definition, we can identify three main characteristics of stagflation. They are high inflation, high unemployment, and slower economic growth. Let’s discuss them separately.

High inflation – 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.

“Inflation can be defined as the increase in the general price level of goods and services”To read more about inflation, kindly click here

High unemployment – Unemployment can be defined as the percentage of unemployed individuals in a labor force. 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.

Slower economic growth – 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.

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

How to measure stagflation?

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.

What is the difference between stagnation and stagflation?

There is a distinct difference between stagnation and stagflation.

Stagnation means slower economic growth. At a stagnation, the economy has slower growth and increasing unemployment. In this situation, there is no higher inflation.

But, during stagflation, beyond the above-mentioned stagnation economic conditions, inflation is very high. So, stagflation is a rare economic situation, that is very unfavorable.

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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History of stagflation

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.

Are we in a period of stagflation?

“I think it’s inevitable that we’re going to hit a recession. Whether this is a mild recession or we go into stagflation will be the big question.”

– Ted Jenkin – CEO OF OXYGEN FINANCIAL-

Ted Jenkin said that people’s money simply doesn’t go as far now due to a mix of inflation and shrinkflation, in which product manufacturers cut the contents of everything we buy.

Many believed that the United States had not yet experienced stagflation, but that it may soon—at least for a brief time—in mid-2022. In June 2022, Forbes magazine made the case that stagflation was likely because economic officials would prioritize reducing unemployment before addressing inflation.

Annual U.S. inflation is at a 40-year high, and as interest rates increase, some sectors of the economy are cooling. Since the beginning of the year, job growth has slowed, consumer spending growth has slowed, and home sales have declined in recent months. Supply chains are still disrupted by the conflict in Ukraine and issues with production brought on by the Covid-19 epidemic.

We can see some similarities between the situation in the 1970s and today. As example, the cost of living is rising due to rising food and oil prices, and business executives are expressing anxiety about the state of the economy.

But there is a key difference between the situation in the 1970s and today. The unemployment rate peaked in the 1970s and the first part of the 1980s at about 10%. In June 2022, it was only 3.6% for the fourth consecutive month.