Stagflation

In News

• Recently, the world is facing high inflation including the developed countries like the US which some experts sign as a stage of stagflation.  

What do you mean by stagflation?

• Stagflation is characterised by slow economic growth and relatively high unemployment or economic stagnation which is at the same time accompanied by rising prices (inflation).
• Stagflation can be alternatively defined as a period of inflation combined with a decline in the gross domestic product (GDP).  
• The idea became popular during the 1970s when the U.S. economy witnessed high price inflation due to the oil shock as well as an economic recession marked by negative economic growth.

Latest concerns about stagflation

• Outbreak of the COVID-19 pandemic and the curbs imposed to contain the spread of the virus caused the first major recent economic slowdown worldwide.
• Ensure optimum conditions: The challenge for policymakers, especially central banks, is to ensure optimum conditions whereby output grows at a healthy pace, helping businesses in the economy to create jobs at a steady pace and thus keeping unemployment low.
• High economic growth invariably spurs faster inflation which is why many central banks have a specific mandate of ensuring that the pace of price gains does not exceed a specified target level or range.
• The most difficult problem for policymakers is when inflation runs high even as economic output either stagnates or, worse, shrinks.
  • The slowdown in economic activity, in turn, leads businesses to shed jobs and the resultant situation is termed as ‘stagflation’.
• The subsequent fiscal and monetary measures taken to address the downturn, including substantial increases in liquidity in most of the advanced economies, fuelled a sharp upsurge in inflation.
• Supply shock: While the Fed and the Bank of England are among central banks that have started raising interest rates to cool soaring prices, the ongoing war in Ukraine following Russia’s invasion have caused a fresh and as yet hard-to-quantify ‘supply shock’.

Way Forward/ Suggestions

• With the prices of commodities ranging from oil and gas to foodgrains, edible oils and fertilisers all surging sharply in the wake of the conflict, authorities face a battle to contain inflation entirely caused by supply factors that are far harder to manage.
• It’s been a series of inflationary shocks that are really different from anything people have seen in 40 years which is not seen regularly.
• The need of the hour is to find price stability out of this.

Source: TH