Authorities worldwide, particularly central bankers, are feverishly trying to formulate the appropriate set of policies to ensure that inflation, currently running at multi-decade highs in some advanced economies including the U.S., is cooled without triggering a recession. Former Federal Reserve Chairman Ben Bernanke told The New York Timeslast month that he foresaw a period in the near future “where growth is low, unemployment is at least up a little bit and inflation is still high”, adding, “So you could call that stagflation”.

Stagflation, often known as recession-inflation, is characterised by low economic growth, high unemployment, and high inflation.

It creates a conundrum for policymakers, because efforts aimed at lowering inflation may aggravate unemployment. Inflation is not meant to happen in a poor economy, thus this is an unusual situation.

The statement is said to have been originated by Iain Macleod, a Conservative Party MP in the United Kingdom, during a speech on the UK economy in November.

In most cases, growing inflation occurs when an economy is booming: people are earning a lot of money, demanding a lot of products and services, and prices continue to rise as a result. Prices tend to stall when demand is low and the economy is in the doldrums, according to the contrary reasoning (or even fall).

Stagflation, on the other hand, is a scenario in which an economy has the worst of both worlds: growth is mainly stagnate (along with rising unemployment), and inflation is not only high, but consistently so.

A supply-side shock is frequently the source of stagflation. For example, rising commodity prices, such as oil prices, will increase business costs (making transportation more expensive) and move short-term aggregate supply to the left. Inflation rises and GDP falls as a result of this.

Trade unions with strong negotiating power - Trade unions with strong bargaining power may be able to negotiate for better salaries even when the economy is slowing. Inflation is fueled in large part by higher wages.

Falling productivity - When an economy's productivity declines, workers become less efficient, costs rise, and output decreases.

Increased structural unemployment - If conventional industries disappear, we may see an increase in structural unemployment and a reduction in output. As a result, even if inflation is rising, we can expect more unemployment.

The outbreak of the COVID-19 pandemic, as well as the measures used to restrict the virus's spread, resulted in the world's first severe economic slowdown in recent memory.

Inflation spiked sharply as a result of subsequent fiscal and monetary measures adopted to address the recession, including large liquidity infusion in most advanced economies.

The ongoing conflict between Ukraine and Russia, as well as Western sanctions against Russia, has resulted in a new and difficult-to-quantify' supply shock.'

Source: The Hindu