Stagflation is an economic condition characterized by stagnation, meaning slow/negative growth, accompanied by high unemployment rates and inflation. Economic policymakers find it challenging to address this situation, as attempting to fix one issue may worsen the other.
Stagflation, once considered impossible by economists, has occurred in developed countries since the 1970s. Policies aimed at addressing slow growth tend to worsen inflation, and vice versa. This makes tackling stagflation difficult.
The term stagflation was first used by British politician Iain Macleod in 1965 during a speech in the House of Commons in the United Kingdom, describing the combined effects of inflation and stagnation as a "stagflation situation."
The term was revived in the United States during the 1970s oil crisis, leading to a consecutive five-quarter negative GDP growth, creating a recession. Inflation doubled in 1973 and reached double digits in 1974.
The real impacts on people can be traced by simply adding the inflation rate and the unemployment rate.
Economists are still debating the fundamental causes of stagflation. Generally, stagflation can occur when there is a supply shock, an unexpected event like a disruption in the supply of oil or a scarcity of essential components. Such a shock occurred during the COVID-19 pandemic, impacting everything from laptops to cars and home appliances, slowing down production. Such a shock can affect all factors that contribute to stagflation.
Remember, stagflation is a combination of three negatives: slower economic growth, higher unemployment, and higher prices. This is a combination that should not exist in classical economic logic. When people have less money to spend, prices should not rise.
Therefore, there is no definite cure for stagflation. The consensus among economists is that productivity should be increased until it leads to higher growth without additional inflation. This will then allow the tightening of monetary policy to control the inflation component of stagflation.
It's easier said than done, so the key to preventing stagflation is for economic policymakers to be extremely proactive in avoiding it. Hopefully, experiencing this situation will provide us with valuable experience for the future.
Dr. Bilinç Dolmacı
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