What causes stagflation? Why is stagflation bad? What is the cure for stagflation? What is an example of stagflation? Key Takeaways Stagflation refers to an economy that is experiencing a simultaneous increase in inflation and stagnation of economic output.
Stagflation was first recognized during the s when many developed economies experienced rapid inflation and high unemployment as a result of an oil shock. The prevailing economic theory at the time could not easily explain how stagflation could occur. Since the s, rising price levels during periods of slow or negative economic growth have become somewhat of the norm rather than an exceptional situation. Article Sources. Investopedia requires writers to use primary sources to support their work.
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Investopedia does not include all offers available in the marketplace. Natural unemployment is the number of people unemployed due to the structure of the labor force, such as those who lack the skills to gain employment. Nixon Shock Nixon Shock refers to the economic actions taken by President Richard Nixon in that eventually led to the collapse of the Bretton Woods system.
What Is a Crack-Up Boom? A crack-up boom is the crash of the credit and monetary system due to continual credit expansion and price increases that cannot be sustained long-term. What Is a Monetarist? A monetarist is someone who believes an economy should be controlled predominantly by the supply of money. Misery Index Definition The original misery index combines the rates of inflation and headline unemployment as a measure of a nation's economic health.
Economic Recovery Definition An economic recovery is a business cycle stage following a recession that is characterized by a sustained period of improving business activity.
Partner Links. Related Articles. Macroeconomics Stagflation in the s. Macroeconomics An Explanation of Stagflation. Macroeconomics What Causes a Recession? The ominous prognostication was made on the basis of a set of dismal economic indicators that have rattled everyone.
Growth stalled to just 4. Even the first advance estimates projected economic growth at just 5 per cent for the whole year while it estimates the nominal GDP to grow at just 7. If stalling growth wasn't worrying enough, the government is faced with rising inflation that reached 5. Subscribe to ETPrime. Browse Companies:. Find this comment offensive? This will alert our moderators to take action Name Reason for reporting: Foul language Slanderous Inciting hatred against a certain community Others.
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Develop and improve products. List of Partners vendors. Table of Contents Expand. Table of Contents. How Does Stagflation Work? Could Stagflation Reoccur? By Kimberly Amadeo. Learn about our editorial policies.
Reviewed by Eric Estevez. Learn about our Financial Review Board. The unusual conditions that created stagflation during the s are unlikely to reoccur.
Key Takeaways Stagflation is stagnant economic growth plus high inflation and high unemployment. It is caused by conflicting contractionary and expansionary fiscal policies. Stagflation got its name during the recession, when GDP growth was negative for five quarters. Because of changes in policy and economic conditions, stagflation is unlikely to reoccur today. Article Sources. Your Privacy Rights. To change or withdraw your consent choices for TheBalance.
At any time, you can update your settings through the "EU Privacy" link at the bottom of any page. These choices will be signaled globally to our partners and will not affect browsing data. We and our partners process data to: Actively scan device characteristics for identification. Supply crunches have led to surging energy prices, causing some factories in China and Europe to stop production. For many on Wall Street, talk of stagflation sends shivers down the spine, bringing back bad memories of the s.
It's no accident the '70s was the decade to give birth to gritty films like "Taxi Driver" and aggressive music like punk rock. The economies and societies of the developed world were convulsed by the perfect storm of high unemployment and rocketing prices that decade. It was a shock after two decades of relative calm and prosperity after World War II, when governments actively managed their economies to try to keep unemployment low.
After the deflation of the s and the Great Depression , they were happy to tolerate price rises if it meant the jobs market was healthy. The US and global economies went through a recession as oil prices surged and Richard Nixon changed the rules of international finance by unpegging the dollar from gold , which had been the bedrock of the financial system since the end of World War II.
Despite slowing growth, inflation spiralled out of control, with price rises in the US soaring into double digits by the end of the decade. The oil-price shock, high levels of government spending, and unions pushing up wages were all blamed. The resulting stagflation was a nightmare for households and businesses, and smashed the old way of thinking about economics.
It ultimately led to a new set of ideas gaining influence, with governments and central banks particularly in the US and UK inspired by the economist Milton Friedman to slash government intervention and focus on controlling inflation. The new system helped bring back growth but laid the foundations for a new set of problems, primarily soaring inequality and the crisis in housing and finance.
The return of stagflation threatens to turn the post-pandemic period into a mass firefighting exercise.
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