Stagflation occurs when the economy appears to be inflating, money loses value, and no real development is taking place to create jobs.
The economic situation is tough to manage once it does set in because normal economic tools have little impact thereon.
Tax cuts and limited lending raise available cash for companies and customers, thus limiting the availability of borrowable money.
Companies then cut prices to urge business, and development occurs, creating employment.
Many economists and former Federal Reserve System officials have warned of imminent “stagflation” within the U.S. economy.
It’s obvious that stagflation may be a very troubling possibility, but what, exactly, is it?
One of the rarer economic conditions, stagflation, last happened within the U.S. in the 1970s.
The name springs from its two characteristics: simultaneous inflation and economic stagnation.
Taken together, these two conditions can have detrimental effects on companies in any sector.
Since stagflation is so rare, few realize just how devastating time stagflation is often.
However, this vicious economic cycle is so negative that it is necessary to research its causes and effects.
A period of high inflation is never followed by a period of recession, but when the two coexist, the economy is said to be in a state of “stagflation.”
During these periods, the costs of products and services increase as the economic process remains slow and unemployment rates rise.
Typically, a sluggish economy will reduce the demand for goods and services, pushing up prices.
However, stagflation’s dual characteristics exacerbate one another and threaten to accentuate a growing crisis.
Increased rates exacerbate the squeeze on the unemployed and people performing on a shoestring budget.
Because the percentage increases in lockstep with inflation, people that have been laid off recently are forced to dip deeper into their savings.
As consumer spending falls, businesses’ profits fall, and business-to-business (B2B) companies are particularly hard hit.
Once stagflation has begun, it’s exceedingly difficult to reverse.
When the economic process slows or a recession occurs, the Federal Reserve System can adjust monetary policy to stimulate sluggish economies.
This is often precisely what the financial institutions did in the aftermath of the financial crisis of 2008.
However, during a time of stagflation, lowering interest rates to stimulate spending would accelerate inflation, potentially worsening things.
Instead of that, stagflation necessitates a more comprehensive approach to economic policy change.
There are divergent economic schools of thought on the causes of stagflation.
Stagflation, consistent with Keynesian economists, is caused by shocks to energy or food markets, like rises in oil prices.
On the other hand, monetarists assert that stagflation occurs as a consequence of a country’s funds expanding rapidly.
Finally, supply-side economists conclude that stagflation may be a product of a mixture of restrictive market regulations and high taxes.
Each of those variables has an impact on stagflation, and a mixture of all three will send the economy into freefall.
The word “stagflation” was coined in the 1960s by politician Iain Macleod during a period of economic stress within the UK.
He was pertaining to inflation on the one hand and stagnation on the opposite, pertaining to it as a “stagnation condition” at the time.
It was later customary to inquire about the 1970s recessionary period following the oil crisis, during which the United States experienced five consecutive quarters of negative GDP growth.
1 Inflation doubled in 1973 and reached double digits in 1974; by May 1975, unemployment had reached 9%. Other theories suggest that monetary factors also contribute to stagflation.
Nixon abolished the gold standard’s last indirect remnants and brought the Bretton Woods era of international finance to an end.
This effectively eliminated the currency’s commodity backing and put the US dollar and therefore the majority of other world currencies on a fiat basis, removing the bulk of realistic constraints on monetary expansion and currency devaluation.
Proponents of monetary reasons for stagflation ask this case as evidence for her hypotheses, also because of the historical document of simultaneous inflation and unemployment in fiat money-based economies, also because of the countervailing historical document of prolonged periods of simultaneously declining prices and low unemployment under strong commodity-backed currency systems.
Before the 1970s, some economists rejected the notion of a stable relationship between inflation and unemployment on the idea of consumer and producer assumptions about inflation rates.
Consistent with these ideas, people don’t simply change their economic actions in response to inflation.
This is to imply that, under the unbacked fiat medium of exchange in situ since the 1970s, we will expect inflation to continue during times of economic stagnation, which has indeed occurred.