With persistent inflation at its highest level in 40 years and warnings of an economic slowdown, experts are sounding the alarm over an economic calamity. We’re not talking about recession but rather stagflation — a phenomenon that concerns economists and central banks alike.
Definition
Stagflation is an economic event where rising prices meet a slowing economy and high unemployment.
Plainly, the phrase is a play on economic stagnation and inflation.
“The worst thing to have is a growth scare at the same time as in inflation scare, but that’s what happens when central banks fall behind the curve,” economist Mohamed El-Erian said on Bloomberg.
We’ve been here before
The most remarkable stagflation period came in the 1970s, the last time inflation was actually worse than it is today. Back then, energy prices had skyrocketed over OPEC’s oil embargo in 1973, imposed over the U.S.’s support of Israel. That fueled inflation and recession for oil importers like the U.S., while unemployment also skyrocketed higher than 10% in the early ’80s.
What causes stagflation?
There are many theories on what causes stagflation, which is seen as a bit of an anomaly in economics. Conventional wisdom would indicate that high unemployment would depress demand, lowering prices. Stagflation runs counter to that assumption.
Here are three common theories of what causes stagflation:
- Supply shocks of necessary goods
- Too much growth in the money supply, overheating demand
- High taxes and excessive government regulation and social programs
While no one knows for sure the root cause of stagflation, more and more, economic experts believe the country is headed there.