Stagflation is an economic trend in which inflation and unemployment rise while general growth of the economy is slow. It can be difficult to correct this trend, because focusing on one aspect of the problem can exacerbate other aspects. Many governments try to avoid stagflation through fiscal policy, by promoting even and healthy growth and attempting to prevent inflation. If the condition continues long enough, it will trigger an economic recession and an ultimate self-correction.
One of the most well-known examples of stagflation in the United States occurred in the 1970s, during the oil crisis. Several other nations including the United Kingdom experienced this condition during this period, as high oil prices contributed to general inflation while employment and the domestic economy remained sluggish. In the United States, the Federal Reserve Bank ultimately stepped in, freezing the money supply and triggering a recession.
The word is a portmanteau of “stagnation” and “inflation,” and it appears to have been coined in 1965 by a member of the Conservative Party in Britain. He first mentioned stagflation in a House of Commons speech on 17 November, discussing the unique situation that the British economy was in. As the problem spread to other nations, the use of the term became widespread, since it was a convenient shorthand to describe a serious issue.
The causes of stagflation are widely debated. Some economists believe that excessive government regulation, for example, contributes to it. Others believe that it may be triggered by outside events, such as a sudden climb in the price of a commodity like oil; this is known as shock theory. Whatever the cause, stagflation may take some hard work to correct, and it can be difficult to ride out such a period.
In the case of the 1970s, actions by the Federal Reserve Bank did lead to a recession, but ultimately the economy stabilized, with the unemployment rate naturally self-correcting while inflation went down. In the 1980s, several measures were used to promote economic growth, which also helped the nation recover from the period of stagflation. Consumers may suffer greatly during such a time, as they find goods and services too expensive to afford, while they cannot obtain jobs to pay for basic needs. Since the government may restrict the availability of loans in an attempt to combat the situation, consumers may have to drastically cut their budgets to survive.