What is Stagflation?

Stagflation refers to an economy marked by slow economic growth, high inflation, and high unemployment.¹

What causes stagflation?

Economists generally agree that supply shocks and fiscal and monetary policies are two root causes of stagflation¹. A supply shock is anything that “reduces the economy's capacity to produce goods and services at given prices.”¹ For example, a shortage of goods, services, or laborers in the workforce could create supply shocks and contribute to stagflation.¹ Poor fiscal and monetary decisions also prompt stagflation, with significant increases in the money supply being the most important.¹

What are the consequences of stagflation?

Stagflation directly impacts the affordability of household and consumer products, making it harder for households to meet basic needs.² For investors, stagflation can result in “lower profit margins due to higher input prices and lower sales.”² Moreover, it could “decrease the growth in companies’ earnings per share, which impacts stock prices.”²

Example

During the “Great Inflation” of the 1970s, unemployment and inflation rates were high. Organization of the Petroleum Exporting Countries (OPEC) declared an oil shipping embargo to the United States, causing oil prices to skyrocket by over 300 percent.²

In an attempt to mitigate stagflation, former President Richard Nixon initiated several moves to try and keep inflation low, create jobs, and protect the US dollar:

• A 90-day freeze on wages and prices
• 10% import tariff
• The removal of the US from the gold standard.  

However, these moves ultimately resulted in stagflation.²

Sources

1. What is stagflation? Understanding the economic phenomenon that stifled growth through the 1970s. Business Insider.
2. Stagflation: Definition, Causes & Consequences. Seeking Alpha.
   

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