Stagflation Explained – Definition and Causes

Stagflation is not a word one hears often. The term is used for a concept which was considered impossible throughout parts of recent history.

Definition of Stagflation

Before taking a detailed look at stagflation and its historical references, we should find a definition for it. Generally, stagflation is described as a condition of weak economic growth, high unemployment, and high inflation. Inflation as defined is a sustained increase in the general prices of goods and services.

Stagflation was thought impossible by many during the peak of the Keynesian macroeconomic theory, which was popular in the decades following World War II. According to Keynesian economics, inflation and recession were thought to be mutually exclusive, meaning you could not have one while the other was happening.

British politician Iain Macleod was one of the first to challenge that portion of the theory. During a speech to Parliament in 1965, he coined the term "stagflation" with history since proving it can occur.

Causes of Stagflation

According to economists, one possible factor for stagflation is a severe disruption in the supply chain. For example, if the cost of crude oil spikes to unprecedented levels it could also raise the price of oil by-products, making them non profitable.

Monetary policies of a nation can also result in stagflation. For example, pushing too much money into circulation coupled with fiscal policies like overtaxing or over regulation could bring stagflation.

Once an economy is affected by stagflation, the methods to overcome cab also further exacerbate the problem. For instance, steps taken to lower inflation could result in reduced productivity.

Even as the concept of stagflation can be difficult to comprehend, its effects are not. As such, its occurrence and steps to eliminate it is of paramount importance to a nation.