Stagflation

Stagflation is an economic phenomenon that combines two contradictory trends and is characterized by three main economic features:

• High inflation – prices of goods and services rise significantly, which reduces the purchasing power of money.
• High unemployment – the labour market is characterised by high levels of unemployment, which is an indicator of economic distress and lack of jobs.
• Economic stagnation – gross domestic product (GDP) growth is weak or non-existent, which is also a sign of long-term structural problems in the economy.

This is not a new phenomenon. One of the most famous examples of stagflation was the economic crisis of the 1970s, when the world faced a significant spike in oil prices. The Organisation of the Petroleum Exporting Countries (OPEC) imposed restrictions on oil exports. This led to a serious increase in the price of black gold. This caused a sharp increase in the cost of production in almost all industries and, as a result, high inflation occurred. At the same time, the economies of many Western countries, including the US and the UK, have fallen into recession, leading to a rise in the unemployment rate.

Causes of stagflation

The main causes of stagflation can be varied and complex, involving both external and internal factors:

• Supply shocks – the most common cause is a sharp increase in commodity prices. When commodity prices such as oil rise sharply, production costs also rise, leading to higher prices for consumers. These rising costs can lead to reduced economic activity and increased unemployment.
• Ineffective economic policies – inappropriate fiscal or monetary policies, such as excessive increases in the money supply or high taxes, can lead to inflation while slowing economic growth and increasing unemployment.
• Structural problems in the economy – inefficient industries, underinvestment in new technology or weak infrastructure leading to bottlenecks in production and reduced productivity.

Impact on the economy

Stagflation has serious implications for the economy. It leads to:

• Reduced purchasing power – high inflation leads to an increase in the price of basic goods and services, which hampers households and reduces living standards.
• Unsustainable economic growth – the economy can stagnate, making it difficult to increase employment and stimulate growth.
• Social and political tensions – rising unemployment and rising prices can lead to social protests and political instability.

Could the US economy (and the rest of the world after it) enter a period of stagflation? This question remains unanswered.

TPA Bulgaria

+359 2 981 66 45/46/47

office@tpa-group.bg

128, G.S. Rakovski str, floor 2

1000 Sofia