Inflation and stagflation are two economic conditions that can significantly impact the average person’s life. Inflation is a price rise caused by increased government spending or printing more money. Stagflation is a term that refers to a period when both high inflation and high unemployment occur. Prices rise while demand for goods and services falls, decreasing the gross domestic product (GDP).
How does Inflation differ from Stagflation?
Inflation is the “rate of increase in the overall price level of goods and services in an economy,” and stagflation describes a “combination of high inflation and economic stagnation as reflected by a slow growth rate and high unemployment” [Source]. Inflation entails an increase in the price level, while stagflation is a “stagnant economy hampered not only by slow growth but by high inflation as well.”
So, the distinction between inflation and stagflation is that inflation only focuses on prices increasing, and stagflation shows a combination of high inflation and an economy that is not growing.
Difference between Deflation and Stagflation
The difference between deflation and stagflation is that deflation is the “opposite of inflation.” It explains a decrease in the inflation rate, which is usually a good sign in an economy. On the other hand, stagflation is an economy marred by high inflation and stunt growth and experiences a steadily high unemployment rate. Stagflation is not good for the economy because the economy will not grow, and businesses will fail to expand to their full potential. Also, stagflation is dominated by high inflation, while deflation is low. In a stagflation economy, the inflation rate increases at a faster pace as compared to deflation, whereby the inflation rate decreases. The result of deflation is the normally expected inflation level of 2% or below. In contrast, stagflation might result in a hyperinflation condition in which the buying power of money is reduced. Customers suffer as their income becomes obsolete.
Which is an effect of Stagflation?
An economy experiencing stagflation is likely to have a high inflation rate, which undermines the buying power of local currency and consumers. To workers, stagflation might lead to risks of job losses and lower wages. Businesses also suffer due to lower profit margins since there will be higher input prices and lower sales [Source]. Economists argue that stagflation leads to a high ‘misery index,’ and it measures the “level of distress an average person feels economical” [Source]. It is calculated by adding the seasonally adjusted employment rate to the inflation rate. The unemployment rate also shoots up as employers resort to retrenching their employees to lessen the financial burden of wages and salaries. If unchecked, stagflation might trigger hyperinflation, undermining the local currency’s power to buy products and services. It can also cause stunt growth in the economy and frustrate investors or any business opportunities that might arise.
How to beat Stagflation
According to economists, stagflation can be solved by improving productivity so that more people are employed, and demand for products or services is met [Source]. Also, businesses might need to cut costs so that money is not lost on other activities outside the business’s main objectives. Investors can financially back up some organizations or inject money into some assets with values that do not deplete. Economists can also expand economic activities to other localities and try to bring in foreign currency, stabilizing the inflated local currency. Other solutions would be to increase interest rates quickly and deeply and lower taxes.
Inflation Stagflation in the 1970s
Inflation stagflation in the 1970s was rampant, and its impact was felt in the superpower countries. The phrase stagflation was coined after The US experienced a period of high inflation and high unemployment, which contradicted the Phillips Curve [Source]. There was high unemployment, and prices were skyrocketing daily. Also, the workers’ condition was worsened by wage stagnation since employers could not risk losing any more money through wages and salaries. Some economists blame the Great Inflation on high budget deficits, low-interest rates, and collapse of managed currency rates, oil prices, currency speculators, greedy business people, and avaricious union leaders [Source].
Cost-Push Inflation vs. Stagflation
Cost-push inflation occurs “when the price of inputs push the price of products up” [Source], and stagflation happens when inflation and wages are high, leading to unemployment. Cost-push inflation is blamed for causing stagflation in the 70s in the US. This means that cost-push inflation can cause stagflation together with other factors such as demand-pull inflation.
