What is stagflation?
Since some experts predict stagflation in the near future, central banks around the world are attempting to devise policies to ensure that inflation in some advanced economies, including the United States, is cooled without triggering a recession.
What exactly is stagflation?
Stagflation is a situation characterized by a simultaneous increase in prices and stagnation of economic growth.
It is defined as an economic situation in which the growth rate slows, unemployment remains high, and inflation or price level remains high at the same time. It is dangerous for the economy.
In a low-growth environment, to boost demand, central banks and governments typically try to stimulate the economy by increasing public spending and lowering interest rates. But these policies also tend to raise prices and cause inflation. As a result, these tools cannot be used when inflation is already high, making it difficult to break free from the ongoing situation.
Stagflation in the past:
In the early and mid-1970s, OPEC (the Organization of Petroleum Exporting Countries), which functions as a cartel, decided to limit supplies, due to which oil prices soared around the world. On the one hand, rising oil prices hampered economic growth by limiting the production potential of most Western economies that relied significantly on oil. On the other hand, the rise in oil prices triggered inflation, making commodities more expensive. For example, in 1974, oil prices increased by about 70%, resulting in a significant increase in inflation.
What has caused the recent fears?
While the Covid-19 pandemic and the measures taken to contain the virus caused the recent global economic slowdown, the subsequent fiscal and monetary actions were taken to address the downturn, including significant increases in liquidity in most advanced economies, but it fueled a sharp rise in inflation.
While central banks such as the Federal Reserve and the Bank of England have begun raising interest rates to cool soaring prices, the ongoing war in Ukraine and the resulting Western sanctions on Moscow have caused a new and difficult-to-quantify ‘supply shock.’
With prices of commodities (oil and gas to foodgrains, edible oils, and fertilizers) rising dramatically in the aftermath of the conflict, authorities confront a harsh battle to prevent inflation that is now almost exclusively generated by supply issues that are far more difficult to control.
For more understanding of Stagflation – Here