What is Stagflation?

Stagflation has the characteristics of a recession: negative economic growth and high unemployment, however it is also accompanied with raising prices and inflation. This combination makes for a very unenviable situation for a country, as people's salaries do not increase with inflation causing purchasing power to decrease and therefore goods to be relatively more expensive.

Stagflation was rampant in the 1970s because of a dramatic increase in oil prices. As the price of oil increases it makes production less profitable (example profit margins diminish significantly in industries in which oil is a major input). Thus prices increase as output decreases.

Many critics believe that we are currently on the road to stagflation, if not there already as jobs are lost and prices for basic necessities like food, clothing and gasoline are all rising.

The government’s decision to give money to struggling companies like Citigroup and General Motors is essentially printing money and is a surefire way to inflation and rising prices. Economist John Maynard Keynes claimed that the stagflation that led to Fascism in Europe after World War I was a direct result of the government printing money as well as setting price controls which slowed economic growth.

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