Explaining the Concept of Stagflation in Simple Language
Stagflation is an economic situation where there is slow growth, high unemployment, and rising inflation. It is a difficult problem for policy makers because actions to reduce inflation may worsen unemployment, and vice versa.
In simpler terms, stagflation is a combination of stagnation (slow growth) and inflation (rising prices). No need to make this more complicated than it is!
The term "stagflation" is derived from the combination of "stagnation" and "inflation." It started in the early 1970s and was first coined by Iain Macleod, a British Conservative Party politician and government minister in 1965.
What Is Stagflation?
Stagflation is a combination of two words: "stag" (stagnation) and "flation" (inflation). More precisely, stagflation can be best described as:
"STAGFLATION HIGH INFLATION STAGNANT ECONOMIC GROWTH HIGH UNEMPLOYMENT"
Inflation
Inflation can be defined as an increase in the common price level of goods and services. In other words, the purchasing power of the money which you hold drops substantially.
Stagnation
Stagnation means a lack of growth or development. Economic stagnation refers to a decline in a country's GDP and little or no growth in the economy for a substantially longer time.
Why Does Stagflation Occur?
There are multiple theories to describe why stagflation occurs. One is the supply shock, such as the surge in oil or food prices. Another is excess money flow into the market, and the third is bad government policies.
What Happens in Stagflation?
In stagflation, economic growth decelerates, and investment plummets. This leads to fewer or no job creations. People tend to avoid excess spending and only spend on bare necessities. When public spending goes down, commercial activity drops. Businesses' profits sink, which further leads to rising unemployment and low wages.
Indicators to Determine Stagflation
Producer Price Index (PPI)
The Producer Price Index is the change in the selling price of goods and services produced within the country by native producers. It indicates the price from the seller's point of view as well as the cost of production.
Consumer Price Index (CPI)
The Consumer Price Index is the change in the price of various goods and services consumed by households. This is measured from the consumer's point of view and is also used to define the purchasing power of a household. These indicators are also used to define inflation and deflation in general times.
Understanding the concept of stagflation is crucial for anyone interested in economics. This phenomenon poses significant challenges for policymakers and requires careful consideration of economic strategies to combat its effects.