WHAT IS STAGFLATION?
Stagflation is essentially a portmanteau of economic stagnation and inflation. It is used to describe a period when economic growth has slowed dramatically, consumer prices are rapidly rising, and unemployment is relatively high.
There is no real consensus among economists as to the causes of stagflation, though it has been linked to a supply shock, an unexpected event that abruptly changes the supply of a commodity or product forcing prices up, or poor economic policy, such as making production more expensive in a high inflationary environment.
The most notable example of stagflation occurred during the oil crisis of the early 1970s when the Organization of Petroleum Exporting Countries (OPEC) embargoed oil exports to Western countries. This caused the global price of oil to rise dramatically, and the knock-on effect was a sharp rise in the cost of living, a slump in economic growth and high unemployment.
More recently, the war in Ukraine compounded the supply shocks caused by the Covid pandemic, pushing commodity prices up and magnifying the slowdown of the global economy. Some have argued that this created the foundations for a period of stagflation.
There is no simple cure for stagflation. Raising interest rates to counter inflation can depress growth, while the reverse risks pushing prices ever higher. Governments and central banks must strike a tricky balance between controlling inflation and the risk of wage price spirals and trying to stimulate growth through public spending, support packages or tax cuts. Ultimately, economists argue that productivity needs to increase to the point where it will lead to higher growth without additional inflation.