Understanding Stagflation Its Effects, Significance, and Examples
                     Understanding Stagflation: Its Effects, 
Significance, and Examples
Stagflation is characterized by slow economic growth and 
relatively high unemployment or economic stagnation 
which is at the same time accompanied by rising prices 
(i.e. inflation). 
Stagflation can also be alternatively defined as a period of 
inflation combined with a decline in gross domestic 
product (GDP).
What Is 
Stagflation?
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There is no consensus among economists on the causes 
of stagflation. Each economics school offers its own view 
on its origins. 
However, two main theories may be derived: supply 
shock and poor economic policies.
Causes of 
Stagflation
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The supply shock theory suggests that stagflation occurs 
when an economy faces a sudden increase or decrease in 
the supply of a commodity or service (supply shock), such 
as a rapid increase in the price of oil. 
In such a situation, prices surge, making production 
costlier and less profitable, thus slowing economic 
growth.
The supply 
shock theory
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This theory states that stagflation can be a result of a 
poorly made economic policy. 
For example, the government can create a policy that 
harms industries while growing the money supply too 
quickly. The simultaneous occurrence of these policies 
can lead to slower economic growth and higher inflation.
Poor economic 
policies
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Stagflation occurs when the government or central banks 
expand the money supply at the same time they 
constrain supply.
 The most common culprit is when the government prints 
currency. 
How Does 
Stagflation Work?
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Stagflation got its name during the 1973-1975 recession. 
There were five quarters when gross domestic product 
was negative.
Inflation tripled in 1973, rising from 3.6% in January to 
8.7% in December. It rose to a range of between 10% and 
12% from February 1974 through April 1975.
Stagflation in the 
1970s
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In 2011, people became concerned about stagflation 
again. They worried that the Fed's expansive monetary 
policies, used to rescue the economy from the 2008 
financial crisis, would cause inflation.
Could Stagflation 
Reoccur?
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The situation is dangerous mainly because in normal low 
growth situation the government or the central bank can 
provide economic stimulus via higher public spending and cut 
interest rates.
But the catch is that when inflation is already running high, 
fiscal and monetary stimulus can make it worse as that puts 
more money in the hands of the consumer.
Why is it 
dangerous?
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India may not have yet entered stagflationary phase as of 
now. The US economic growth between 1973-75 saw five 
quarters of negative growth and tripling of inflation to be 
regarded as stagflationary.
Is India in a stagflationary 
phase?
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THANK YOU
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