Stagflation is characterized by slow economic growth and relatively high unemployment or economic stagnation, which is at the same time accompanied by inflation.
- Stagflation is a period of rising inflation but falling output and rising unemployment.
- Stagflation is often a period of falling real incomes as wages struggle to keep up with rising prices.
- A degree of stagflation occurred in 2008, following the rise in the price of oil and the start of the global recession during the collapse of Lehman Brothers.
- Stagflation is difficult for policy makers. For example, the Reserve Bank can increase interest rates to reduce inflation or cut interest rates to reduce unemployment. But, they can’t tackle both inflation and unemployment at the same time.
Causes of Stagflation
- When Oil price rises it causes a rise in business costs, transport will become more expensive and short run aggregate supply will shift to the left. This causes a higher inflation rate and lower GDP.
- If trade unions have strong bargaining power they may be able to bargain for higher wages, even in periods of lower economic growth. Higher wages are a significant cause of inflation.
- If an economy experiences falling productivity, workers becoming more inefficient; costs will rise and output fall.
- If there is a decline in traditional industries, we may get more structural unemployment and lower output. Thus we can get higher unemployment, even if inflation is also increasing.
- If there is disruption to supply chains, there prices will start rising. The supply shock will also cause decrease in unemployment.
Moderate stagflation
People may talk about stagflation if there is a rise in inflation and a fall in the growth rate (i.e. the economy is growing at a slower rate. This is less damaging than higher inflation and negative growth. But, it still represents a deterioration in the trade-off between unemployment and inflation.
Currently, inflation is very high, and economists are worried about economic growth because of the war in Ukraine as well as lockdowns in China and supply chain disruptions related to the Covid-19 pandemic.
Are we in a period of stagflation now?
Not necessarily. According to the ministry of statistics and programm implementation, India’s FY22 GDP growth is likely to be 8.9 percent this year. We are not in a situation of stagflation as of now. The growth may come down from whatever was being projected earlier, but it is still likely to be closer to 7 odd percent.
Expectation is highly on manufacturing seeing bigger share in GDP in India and even we can expect India to gain market share in global goods exports so that it is not just dependent on the global beta of trade growth improving, but it gets the alpha of increasing market share in global goods exports.
