STAGFLATION
Source: The Indian express
Context
The Department of Economic Affairs in its Monthly Economic Review for May 2022 states that India is expected to witness slowing growth and faces an upside risk to the fiscal deficit owing to the recent excise duty cuts on fuel, but it has a low risk of Stagifation owing to careful stabilisation policies.
What is Stagflation?
- Stagflation is a term that defines a situation characterized by a simultaneous increase in prices (Inflation) and stagnation of economic growth.
- It can also be defined as a period of inflation combined with a decline in the gross domestic product (GDP).
- The situation may comprise of following elements
- The growth rate of the economy slows down.
- The level of unemployment remains steadily high.
- Yet the inflation or price level remains high at the same time.
- The term stagflation was coined by Iain Macleod, a Conservative Party MP in the United Kingdom, in November 1965.
- It was the time when many developed economies experienced rapid inflation and high unemployment as a result of an oil shock.
Why is stagflation the worst?
- Typically, inflation rises when the economy is growing fast.
- That's because people are earning more and more money and are capable of paying higher prices for the same quantity of goods
- When the economy stalls, inflation tends to dip as well again because there is less money now chasing the same quantity of goods.
- Stagflation is said to happen when an economy faces stagnant growth as well as persistently high inflation. In other words, the worst of both worlds.
- That is because with stalled economic growth, unemployment tends to rise and existing incomes do not rise fast enough and yet, people have to contend with rising inflation.
- So people find themselves pressurised from both sides as their purchasing power is reduced.
- Simply put, stagflation is a contradiction. Slow economic growth would likely lead to an increase in unemployment but should not result in rising prices.
- This is the problem with this phenomenon an increase in the unemployment level results in a decrease in consumer spending power.
case study of stagflation
- The most famous case of stagflation happened in the early and mid-1970s when OPEC (The Organisation of Petroleum Exporting Countries), which works like a cartel, decided to cut supply and sent oil prices soaring across the world.
- On the one hand, the rise in oil prices constrained the productive capacity of most western economies that heavily depended on oil hampering economic growth.
- On the other hand, the oil price spike also led to inflation and commodities became more costly.
- For instance, just in 1974, the oil prices went up by almost 70 per cent.
- Consequently, inflation in the US reached almost double-digits.
