Stagflation is characterized by stagnation and inflation.
The concept of stagflation combines two terms: stagnation and inflation . It is a notion developed by imitation of the English word stagflation .
Stagnation and inflation
Stagflation, therefore, is a situation that affects an economy when it registers stagnation ( no growth ) and inflation ( increasing prices ). This usually leads to multiple social consequences due to the impoverishment of the majority of the community.
Stagflation can be described as a severe type of economic recession . Activity is falling, unemployment is rising, and yet prices are rising. As a result, many people have trouble meeting their basic needs , as they do not have enough money to buy food, medicine, and other essential products.
Gross Domestic Product
It is common to say that an economy is in recession or stagnant if its Gross Domestic Product ( GDP ) declines for two consecutive quarters. When, at the same time, there is high inflation, what is known as 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 the goods and services demanded by a region or country over a given period, which is usually a quarter or a year. Taxes must be added to this sum of gross values and subsidies must be subtracted. The agent implicit in this definition is the end user , who not only demands but buys these goods and services.
Fighting stagflation
Experts say that reversing stagflation is very complex . For this purpose, monetary policy is often used (a concept also known as financial policy ), which consists of using the variable of money in circulation (the amount of money ) in order to stabilize the economy, for its control and maintenance. Depending on the tactic chosen by the experts, one can speak of expansionary (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 its main tool to combat stagflation. Through interest rate adjustments, these institutions can help stimulate economic activity to get out of stagnation (if the interest rate is reduced) or mitigate inflation (if the interest rate is increased). A balance between the two positions is essential to prevent social costs from becoming more pronounced.
Both the unemployment rate and prices are rising.
If monetary and fiscal policies are chosen to reduce inflation, they usually deepen the recession. On the other hand, if these policies are intended to boost economic activity, they usually encourage an increase in inflation. The main obstacle to stagflation is an absolute distortion of markets, which leads governors and central banks to an almost inevitable financial failure. On the one hand, certain sectors decrease, including the production of goods; however, the production of services usually increases.
If the economy of a country experiencing stagflation is open and the problem also involves devaluation , then it is possible that activities that depend on foreign currency will contract, while those that generate foreign currency will expand. This phenomenon can be a great challenge for economists, since the economic signals they perceive are extremely confusing, and this prevents them from deciding clearly how to proceed, what measure to apply and at what point. In fact, some say that this is the worst possible situation for the economy.