Stagnation and inflation characterize stagflation.
The concept of stagflation combines two terms: stagnation and inflation . This is a notion developed by imitation of the English word stagflation .
Stagnation and inflation
Stagflation, therefore, is a situation that an economy suffers from when it registers stagnation ( does not grow ) and inflation ( increases in prices ). This usually has multiple social consequences due to the impoverishment of the majority of the community.
It can be said that stagflation is a serious type of economic recession . Activity falls, the unemployment rate rises and yet prices increase. In this way, many people have problems satisfying their basic needs , since they do not have enough money to purchase food, medicines and other essential products.
Gross Domestic Product
It is common for an economy to be indicated as being in recession or stagnant if its Gross Domestic Product ( GDP or GDP ) declines two quarters in a row. When, simultaneously, there is high inflation, the so-called stagflation occurs. This is the formal explanation, the fundamental cause of this economic problem, which is among the most serious given the challenges it presents to control and resolve it.
Gross domestic product reflects the monetary value of all goods and services demanded by a region or country over a given period, which is usually a quarter or a year. To this sum of gross values, taxes must be added and subsidies subtracted. The agent implicit in this definition is the end user , who not only demands but buys said goods and services.
Fight stagflation
Specialists affirm that reversing stagflation is very complex . For this purpose, a monetary policy is usually used (a concept that is also known as financial policy ), which consists of the use of the variable of money in circulation (the amount of money ) with the purpose of stabilizing the economy. , for its control and maintenance. Depending on the tactic chosen by specialists, one can speak of expansive (or quantitative ) or restrictive policy, with the goal of increasing or reducing the interest rate or the amount of money, respectively.
Each government has its central bank as the main tool to combat stagflation. Through adjustments in the interest rate, these institutions can contribute to boosting economic activity to break out of stagnation (if the interest rate is reduced) or to mitigate inflation (if the interest rate increases). The balance between both positions is essential so that social costs are not accentuated.
Both the unemployment rate and prices increase.
If the selected monetary and fiscal policy aims to reduce inflation, the recession generally worsens. On the other hand, if these policies seek to boost economic activity, they tend to encourage a rise in inflation. The biggest obstacle to stagflation is an absolute distortion of the markets, leading governors and central banks to almost inevitable financial failure. On the one hand, certain sectors decrease, including the production of goods; However, that of services usually increases.
If the economy of the country experiencing stagflation is open and the problem also leads to devaluation , then it is possible that activities that depend on foreign currencies will contract, while those that generate them will expand. This phenomenon can pose a great challenge for economists, since the economic signals they perceive are extremely confusing, and this prevents them from clearly deciding how to move forward, what measure to apply and at what point. In fact, there are those who claim that this is the worst possible situation for the economy.