Stagflation is a combination of the words “stagnation” and “inflation.” To better understand stagflation, it’s helpful to know what those words mean in an economic context.
- Stagnation is a time of little to no economic growth that often coincides with high unemployment.
- Inflation is when the overall price of goods and services increases. If one specific product or service gets more expensive, that doesn’t point to inflation. Inflation happens when prices of many goods and services in an economy generally go up over time.
In short, stagflation is an economic period characterized by high inflation, low consumer demand, relatively high unemployment, and slow or no economic growth.
Because of an economic model called the Phillips curve, some economists used to think that inflation and unemployment had a predictable, inverse relationship. The common belief was that when inflation goes up, unemployment goes down. And when unemployment goes up, inflation goes down.
This led many economists to think that stagflation was impossible—or at least extremely unlikely. Then, the country’s first major stagflation period—known as the Great Inflation—happened in the 1970s.
What’s the difference between stagflation and inflation?
Inflation is one part of stagflation. But inflation can also happen in periods of economic growth.
During periods of inflation, prices of things like food, transportation, education, gas and housing rise over a sustained period of time. But periods of inflation aren’t typically accompanied by the other hallmarks of stagflation, like high unemployment.
What’s the difference between stagflation and a recession?
Recessions happen when the economy experiences a pervasive and significant economic decline that lasts more than a few months. Like stagflation, recessions might also be marked by high unemployment. But unlike stagflation, recessions usually aren’t accompanied by inflation.
FAQs
Stagflation is a condition in which slow economic growth (stagnation), rising prices (inflation), and rising unemployment all happen at the same time. Although it is rare for slow economic growth and high inflation to coexist, it has happened in the past, and many believe it could happen again.
What is the answer to stagflation? ›
The most obvious fixes for stagflation tend to be deeply unpopular in the U.S. For example, if the price of oil is a key cause of out-of-control prices, privatization or price controls might be imposed. If higher wages are blamed for inflation, the government might limit wage increases.
What is one consequence of stagflation quizlet answers? ›
The economy drastically slows down as money loses its buying power. The value of a country's currency drops.
Which of the following is the best explanation of stagflation? ›
Explanation: Stagflation is a unique combination of stagnant growth in the economy, high level of unemployment and high inflation level.
What is stagflation for kids? ›
In economics, the term stagflation is used when there is almost no growth in production, yet there is high inflation, and unemployment is high. This was supposed to be impossible under the kind of economics described by Keynes (Keynesian economics).
What is stagflation best described as quizlet? ›
Stagflation is a situation with high unemployment rates, high inflation rates, and little or no growth in the economy.
What is the stagflation summary? ›
In economics, stagflation or recession-inflation is a situation in which the inflation rate is high or increasing, the economic growth rate slows, and unemployment remains steadily high.
What two words make stagflation? ›
Stagflation is a portmanteau, that is, a word that blends two others (in this case, "stagnation" and "inflation").
How do you survive stagflation? ›
When stagflation occurs, don't panic, sell your stocks and bonds and invest in rare art, gold, or other unusual commodities. Stagflation is not a good reason to completely abandon a sound investment strategy.
What makes money during stagflation? ›
Commodities. Commodities are the raw materials that are used to make other products. During stagflation, agriculture and oil commodities, in particular, may be poised to outperform stocks and bonds.
Stagflation is a combination of three negatives: slower economic growth, higher unemployment, and higher prices.
Why is stagflation so hard to fix? ›
Avoiding stagflation is difficult, because financial regulators have to balance two competing interests: inflation and unemployment. Dealing with inflation usually involves hiking interest rates, making it more expensive to borrow money. That depresses consumer demand and makes running a business more expensive.
Why is stagflation so bad? ›
For those who are employed, stagflation could lead to risks of job losses and lower wages, which would decrease consumer confidence and purchasing power. Investors also suffer from stagflation. Stagflation generally results in lower profit margins due to higher input prices and lower sales.
Which of the following best describes the stagflation of the 1970s economy? ›
Expert-Verified Answer. The correct answer for the question that is being presented above is this one: "the period of rising prices and declining employment in the 1970s." The statement that best describes stagflation is the period of rising prices and declining employment in the 1970s.
Why is stagflation so hard to fix quizlet? ›
Why is stagflation so hard to fix? The economic solution to one cause of stagflation only encourages the other cause. When the inflation rate increases, the unemployment rate decreases, and vice versa.
What is the main cause of stagflation? ›
Stagflation is the combination of high consumer price inflation and stagnant economic growth, usually accompanied by rising unemployment. It can be caused by a supply-side shock, such as sharply rising oil prices, or by poor economic policies, such as too-high government spending or too-low interest rates.
How long did 1970s stagflation last? ›
Economists have shown that stagflation was prevalent among seven major market economies from 1973 to 1982. After inflation rates began to fall in 1982, economists' focus shifted from the causes of stagflation to the "determinants of productivity growth and the effects of real wages on the demand for labor".
What is the difference between a recession and a stagflation? ›
If the GDP of a country is decreasing over two consecutive quarters, it's considered to be in a recession. Stagflation, on the other hand, is a combination of stagnation and inflation. It's characterized by high inflation and slow economic growth, which can result in rising unemployment and falling asset prices.
