Stagnation refers to an economic phenomenon characterized by economic stagnation, high inflation and high unemployment. It is a contraction of stagnant words and inflation. When a country’s economy is stagnant, the standard measure of its economic product (GDP) grows at a slow pace, along with an increase in raw material prices and a decrease in purchasing power among consumers. Typically, stagflation is a major challenge for monetary policy makers as precautionary measures against one make the other worse. The remedies against the high unemployment rate are practically contrary to the remedies for the inflationary cycles and vice versa.
What are the causes of stagflation?
The term stagflation originated in the United States in 1970 when the economy experienced a persistent economic collapse that pushed inflation into a time of slow economic growth. Before this economic crisis, economists had predicted that it was impossible for a stagnant economy to face inflation at the same time. Based on economic principles as outlined in Keynesian theory, inflation is a by-product of economic growth. In Keynesian theory, the forces of demand and supply influence the economy. When demand is high, prices rise during an economic boom. However, from the economic turbulence of 1970 attributed to oil embargoes,
Stagnation also occurs when there are shocks on the supply side, characterized by a rapid increase in oil prices, an increase in government taxes and an increase in interest rates. This situation translates into an increase in production costs for companies, making them costly and unprofitable, hence slow economic growth. At the same time, the government can increase the money supply by creating expansive policies and conflicting contraceptives that translate into unemployment and inflation.
Can stagflation occur?
In 2010-2011, the United Kingdom recorded stagflation where inflation rose to 5% and the economy remained in recession with a negative growth rate. The depression was caused by the devaluation of the pound, the rise in oil prices, rising import prices, rising food prices and the effects of higher taxes. This has led to inflation and has downgraded living standards due to unemployment.
In the United States, the federal government has established expansive monetary policies to save the economy from the consequences of the 2008-2009 financial crisis. At the same time, Congress approved an expansive fiscal policy including deficit spending and a package of economic stimuli. People have warned of the possibility of stagflation while inflation and unemployment have worsened. Economists have assured that stagflation is not likely to recur since the unusual conditions that caused stagflation were unlikely to happen in 1970 as the federal government would not implement economic policies that would limit supply.
After the removal of the United States from the gold standard, most countries around the world have agreed to evaluate their currencies with the price of gold or the US dollar. This move has transformed the dollar into a global currency since 1944 and has been used to create a trade balance especially in international trade. Furthermore, the interdependence between countries and economic integration has guaranteed commitment to a coherent direction in the implementation of monetary and fiscal policies by global leaders.