What is stagflation in economics- All you need to know!

During a period of stagflation, the economy experiences a slowdown in activity as prices continue to grow. The name was created by combining the words stagnation and inflation. This phenomenon first appeared in textbooks in the 1970s, when the oil crisis led prices to soar at the same time that the economy saw a steep decline.

"It is possible to claim that 'moderate' stagflation is already taking place," economist Nouriel Roubini stated in a recent essay. Many developed countries' economies are contracting sharply as inflation soars and government assistance wanes, according to the author.

The crisis that engulfed the United States in the mid-1970s is a classic example. Paul Volcker, the chairman of the Federal Reserve of the United States, has recommended methods for gradually bringing the economy out of a state of stagnation. He was able to arrest the devaluation of money by imposing unpleasant measures on enterprises and consumers. 

President Jimmy Carter, under whose administration this work was completed, was not re-elected to a second term and continues to be one of the most unpopular presidents in the history of the United States.

The notion, as well as the indications and symptoms of manifestation!

Stagflation is characterized by: 

• rising inflation; 
• the slowdown in economic growth;
• Unemployment is on the rise.

There are worries about this unfavorable combination since it increases unemployment while lowering unemployment increases the rate of inflation. For the uninitiated, inflation is defined as a sustained increase in the prices of goods and services. However, it may also be defined as a continuous fall in the buying power of the currency.

The decline in supplies, along with a protracted pandemic caused by the Delta coronavirus, is preventing the economy from regaining its footing. Surveys of businesses in the United States, the United Kingdom, and the Eurozone reveal that activity has slowed as a result of longer delivery delays and a buildup of incomplete orders. In China, where regulatory pressure and high energy prices have resulted in the shutdown of several businesses, a significant slowdown in output growth has been seen.

It is also in a tough position, and the speed of recovery is decreasing: in August 2021, the data decreased to 3.7 percent year on year, down from 4.7 percent in July and 8.9 percent in June, indicating a slowdown of recovery. According to official figures, the annual rate of price rise hit 7.78 percent, the highest level since 2016. The threat of global stagflation, which has been debated by investment bankers for at least the past month, has now been acknowledged by the international community.

In 2021, the Central Bank lifted the main rate for the sixth time, signaling the prospect of further rate rises in the future. Many economists had predicted a stronger rebound than the one that occurred, with their predictions ranging between 0.25 and 0.5 percentage points. The lockdown, which began in the spring of 2020, assisted in combating inflation by lowering demand. However, recent experience has demonstrated that constraints on demand are becoming less and less significant, and restrictions on production and supply are fueling inflation.

Causes

There is no agreement among economists about the sources of the phenomena; each school of thought has its own interpretation of the phenomenon's beginnings. Consideration should be given to two primary theories.

Reasons for stagflation

• A supply shock is a sudden increase or decrease in the supply of an item or service that is not anticipated.
• Ineffective economic policy

Consequences of Stagflation on the Economy!

Consistently permissive monetary and fiscal policy has the effect of weakening inflationary characteristics and jeopardizing the prospects for economic recovery. Crop yields are being reduced due to climate change. This is the cause of the unplanned increase in the cost of seasonal vegetables, fruits, cereals, and animal feed products. The pandemic waves result in a rise in national self-sufficiency while simultaneously decreasing exports.

Additional factors contributing to the global economic crisis include:

• deglobalization; 
• change in logistics;
• severe immigration restrictions;
• Sino-American confrontation.

How to avoid stagflation?

In order to slow the rate of stagflation, economists must be able to anticipate economic performance in both the short and long future with pinpoint precision. Whenever a country is coming out of a recession, they select the most advantageous time to gradually withdraw money from circulation. Raising interest rates too quickly will make it difficult to restart, and postponing withdrawals will cause inflation and prices to rise even more rapidly.

A prudent use of banking products - deposits, deposits, and more deposits - by the average customer can help to reduce the harm to their funds. Sovcombank's chief analyst, Mikhail Vasilyev, predicts that deposit rates will rise by 0.75 percent every month until the end of the fiscal year in December. Deposit rates that are high encourage consumers to save more, which reduces demand for goods and services, which prevents prices from growing more, and as a result, inflation slows down.

Why stagflation is bad?

A slowdown in economic growth is a typical element of the macroeconomic cycle and should not be taken for granted. It is necessary for the market to stabilize when financial speculation is high (as happened with technology stocks during the late 1990s and the housing market during the mid-2000s). This is referred to as a brief recession, which is both unpleasant and inconvenient.

However, there is a distinction between it and stagflation, which occurs when an extended period of economic contraction is accompanied by high inflation rates. The average yearly inflation rate is 2-3 percent; but, if the rate rises by 5 percent or even 10 percent, the situation may deteriorate further.

The problem of stagflation is that the money you have becomes increasingly worthless, and for fixed-income individuals, this means that the value of their monthly paycheck decreases. All of this undermines one's ability to predict the future.