Stagflation is a situation where inflation and unemployment rise while the economy grows slowly. Governments use fiscal policy to prevent it, but it can be difficult to correct. The term was coined in 1965 and the causes are debated. The US experienced stagflation in the 1970s due to the oil crisis, and the Federal Reserve Bank intervened, triggering a recession. The economy eventually stabilized, and measures were taken to promote growth. Consumers suffer during stagflation as goods become expensive and jobs are scarce.
Stagflation is an economic trend in which inflation and unemployment rise while the overall growth of the economy is slow. It can be difficult to correct this tendency, because focusing on one aspect of the problem can aggravate other aspects. Many governments try to avoid stagflation through fiscal policy, promoting smooth and healthy growth and trying to prevent inflation. If the condition persists long enough, it will set off an economic downturn and eventual self-correction.
One of the best-known examples of stagflation in the United States occurred in the 1970s during the oil crisis. Several other nations including the UK experienced this condition during this period as high oil prices contributed to overall inflation while employment and the domestic economy remained sluggish. In the US, the Federal Reserve Bank eventually intervened, cutting off the money supply and triggering a recession.
The word is a portmanteau of “stagnation” and “inflation,” and appears to have been coined in 1965 by a member of the Conservative Party in Britain. He first mentioned stagflation in a November 17 House of Commons speech, discussing the unique situation in the British economy. As the problem spread to other nations, usage of the term became widespread, as it was a convenient shorthand for describing a serious problem.
The causes of stagflation are widely debated. Some economists believe that excessive government regulation, for example, contributes to it. Others believe it could be triggered by external events, such as a sudden rise in the price of a commodity like oil; this is known as shock theory. Whatever the cause, stagflation can take hard work to correct, and it can be difficult to navigate such a period.
In the case of the 1970s, the Federal Reserve Bank’s actions led to a recession, but the economy eventually stabilized, with the unemployment rate self-correcting naturally as inflation declined. In the 1980s, several measures were used to promote economic growth, which also helped the nation recover from the period of stagflation. Consumers can suffer a lot during this period, as they find goods and services too expensive to afford, while they cannot find work to pay for basic needs. As the government may limit the availability of loans in an effort to combat the situation, consumers may need to drastically cut their budgets to survive.
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