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Related to stagflation: Camp David Accords
Stagflation results when inflation increases significantly despite a slowdown in the economy and shrinking demand for products and services that results from rising unemployment and low consumer confidence.
This combination of stagnation and inflation has a crippling effect on economic and political stability. As the central bank strives to stimulate the economy by increasing liquidity and cutting interest rates, it risks fueling inflation, which acts as a drag growth.
At the same time, focusing on controlling inflation rather than easing credit may increase the risk of sending the economy into an extended recession.
A vivid example in recent US history began during the OPEC crisis of 1973 and 1974 when oil and food prices soared, and unemployment grew, while the economy contracted and the stock market lost value. In 1980, the inflation rate was 13.9% rather than the long-term average of 3%, and the prime rate reached 21.5%.
stagflationa situation of depressed levels of real output combined with increases in prices (INFLATION). Stagflation is caused by the dual forces of:
- a deficiency in AGGREGATE DEMAND relative to POTENTIAL GROSS NATIONAL PRODUCT (see DEFLATIONARY GAP); and
- rising FACTOR INPUT costs (see COST-PUSH INFLATION).
Stagflation was a particular problem in many countries during the 1970s and early 1980s as a result of the combined effect of cost-push inflationary pressures emanating from the oil price increases of 1973 and 1979 and the deflationary consequences of reduced real purchasing power in the oil-consuming countries that accompanied these increases. This was exacerbated by the development of higher inflationary expectations.
Orthodox FISCAL POLICY and MONETARY POLICY, accustomed to an apparent trade-off between inflation and employment/output (see the PHILLIPS CURVE), were found wanting in the new situation, and many countries turned to alternative approaches, for example, MONETARISM and SUPPLY-SIDE ECONOMICS.
A slang expression for a period of stagnation and inflation.