Stagflation in a country is the combination of inflation and economic decline. This phenomenon mixes these two concepts, which when produced at the same time are devastating for the economy.
In other words, stagflation arises when a country’s economy is in recession and at the same time increases the cost of living. It comes from the speech in front of the House of Commons that was given in 1965 by the then British finance minister, Ian McLeod. The senior official said that the United Kingdom was in a kind of “stagflation”, combining the words inflation (inflation) and stagnation (stagnation).
This is how in a situation of stagflation a country suffers from stagnation of its economy and increases the cost of the basic basket. It is a very complicated scenario where situations of rising prices, rising unemployment and economic stagnation overlap. This can lead the country to a very serious circumstance of impoverishment.
How can it be distinguished that a country is in stagflation?
On the one hand, economic depression, negative growth rates and high unemployment rate distinguish stagflation. It is also accompanied by an upward spiral of prices. This increase mainly impoverishes the middle and lower strata of society and makes it difficult to allocate resources to business projects.
Until the mid-sixties, these two serious macroeconomic problems (stagnation and inflation) were believed incompatible with each other. This, since generally when an economy goes into recession, inflation falls, and can even go into deflation .
Why do these scenarios happen?
According to the 1970 Nobel Prize in Economics Paul Samuelson, stagflation is a phenomenon “typical of mixed economies due to various factors, where societies generate institutional mechanisms such as unemployment benefits, minimum wages, labor market segmentation, among others, that they make the economy react differently to the theory. ”
The economic programs that have given the best results to combat this phenomenon are labor flexibility, incentive business taxation, less rigid and intervened commercial distribution, competition defense, education and training linked to the productive apparatus, among other macroeconomic measures.