Stagflation

Stagflation is an economic situation in which inflation and economic stagnation occur simultaneously and remain unchecked for a period of time.

The portmanteau stagflation is generally attributed to British politician Iain Macleod, who coined the term in a speech to Parliament in 1965.

The concept is notable partly because, in postwar macroeconomic theory, inflation and recession were regarded as mutually exclusive, and also because stagflation has generally proven to be difficult and costly to eradicate once it gets started.

Economists offer two principal explanations for why stagflation occurs. First, stagflation can result when an economy is slowed by an unfavorable supply shock, such as an increase in the price of oil in an oil importing country, which tends to raise prices at the same time that it slows the economy by making production less profitable.

This type of stagflation presents a policy dilemma because most actions to assist with fighting inflation worsen economic stagnation and vice versa. Second, both stagnation and inflation can result from inappropriate macroeconomic policies.

For example, central banks can cause inflation by permitting excessive growth of the money supply.

The government can cause stagnation by excessive regulation of goods markets and labor markets together, these factors can cause stagflation. Both types of explanations are offered in analyses of the global stagflation of the 1970s.

It began with a huge rise in oil prices, but then continued as central banks used excessively stimulative monetary policy to counteract the resulting recession, causing a runaway wage-price spiral