Stagflation
Stagflation is a not too common economic scenario that occurs when economic growth overall (such as GDP) is sluggish, but prices are rising in an inflationary manner. Not be confused with the typical notion of inflation, stagflation occurs when prices are rising, but demand is not rising along with it. The inflationary condition more typical is when prices are rising but so are other economic facets such as demand.
Stagflation often occurs in concert with a rise in unemployment, which is vexing. Considering that unemployment produces a situation of less disposable income, which in turn lowers demand for goods and services, then one would expect that prices would fall because of less demand. Instead prices rise. Why?
Clearly the rising prices are being driven by forces outside of the supply and demand loop. A relatively recent situation of this phenomenon is the oil crisis of the 1970s. Worldwide oil prices rose while at the same time economic activity was sluggish. The demand for oil should have therefore been lowered as there was less money to drive up demand in all areas, oil included. Prices should have been going lower. A contributing factor to this oddity is that oil was being produced the most by Arab countries that were unaffected by the same economic conditions of the U.S., England and other Western countries.
Stagflation is difficult on consumers since they have less money to pay for goods or services at inflated prices. The U.S. took action when the Federal Reserve Bank froze the money supply. This led to a turn away from stagflation but brought the U.S. into a recession. Not a great tradeoff. But perhaps this made sense in retrospect as a recession, though unwanted, is a more familiar economic condition to manage. The economy did recover from the recession, the unemployment rate lowered, and economic conditions improved.
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Stagflation often occurs in concert with a rise in unemployment, which is vexing. Considering that unemployment produces a situation of less disposable income, which in turn lowers demand for goods and services, then one would expect that prices would fall because of less demand. Instead prices rise. Why?
Clearly the rising prices are being driven by forces outside of the supply and demand loop. A relatively recent situation of this phenomenon is the oil crisis of the 1970s. Worldwide oil prices rose while at the same time economic activity was sluggish. The demand for oil should have therefore been lowered as there was less money to drive up demand in all areas, oil included. Prices should have been going lower. A contributing factor to this oddity is that oil was being produced the most by Arab countries that were unaffected by the same economic conditions of the U.S., England and other Western countries.
Stagflation is difficult on consumers since they have less money to pay for goods or services at inflated prices. The U.S. took action when the Federal Reserve Bank froze the money supply. This led to a turn away from stagflation but brought the U.S. into a recession. Not a great tradeoff. But perhaps this made sense in retrospect as a recession, though unwanted, is a more familiar economic condition to manage. The economy did recover from the recession, the unemployment rate lowered, and economic conditions improved.
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