DISCOVER
×

The Causes & Effects of Stagflation

Updated April 17, 2017

Stagflation is an economic term given to the phenomenon of decreasing economic growth (recession) accompanied with rising prices (inflation). This is contradictory to most modern economic theories; as the demand for good decreases, so should the rate of inflation. It takes a combination of factors to contribute to stagflation, which can have crippling effects on the economy.

Supply Shocks

Large fluctuations in supply, particularly shortages, especially of commodity goods like oil and food can be a cause of stagflation. This will cause prices of goods to rise due to higher demand, as well as a reduction in economic growth, as commodity goods can affect the bottom line production costs of almost every industry. Supply can also be affected by war and political upheaval.

Monetary Policy

If the supply of money rises too rapidly at a rate not in relation to economic growth, it will contribute to stagflation. Monetary policy, like fixing interest and mortgage rates, is controlled by large central banks in most nations. It is their responsibility to issue currency at a level representative of economic progress to stave off inflation. Central banks, as well as monetary policy, can face pressure from political agendas.

Effects

Some effects of stagflation are unemployment, rising prices in all goods, all with a very slow recovery process. Stagflation may also lead to volatility and lack of confidence in markets, leading to even more reactionary manoeuvres by central banks, such as changing interest and exchange rates.

Recovery

The effects of stagflation are much worse than recession and inflation experienced separately, as there is no easy fix. Recessionary conditions call for central banks to cut interest rates and increase government spending, however, these can lead to more inflation, which is half of the problem when dealing with stagflation.

Cite this Article A tool to create a citation to reference this article Cite this Article

About the Author

Tommy Doc is a 2007 graduate of the University of Pennsylvania and an aspiring Internet entrepreneur. He was the sports editor for "The Pennsylvania Independent" while attaining his bachelor's degree in communications and environmental science. Doc is from Atlantic City, N.J. but has lived in Philadelphia, San Diego, New York and currently resides in Austin, Texas.