Stagflation- a threat to the economy

Stagflation is made from two words, stagnation which means slower economic growth along with high unemployment, and inflation which means a rise in prices of different commodities.?

It is believed that in such a condition, stagnation can never occur because the inflation rate and unemployment usually go in opposite directions. But the 1970s, the Great Inflation period proved that stagnation does exist and in a way that it can heavily wreck the economy.?

Cause:?

Stagflation depicts high unemployment, high prices, and slow economic growth. The two root causes believed are supply shocks and fiscal and monetary policies.?

• Supply Shock represents certain conditions under which the economy fails to produce goods and commodities provided at the given prices. It can be in labor, goods, or services.?
• Poor Monetary and fiscal policy can also lead to Stagflation. Monetary policy determines the action of central banks to achieve objectives like stable economic growth. And fiscal policy refers to the guidelines that determine the tax and spending methods of the federal government.?

Other possibilities considered by economists are:

• Oil Price Shock which is a sudden rise in oil prices can cause a decrease in the economy's productivity.?
• Loss of Gold Standard- The gold standard is a monetary system where paper money can be converted to gold provided the gold has a fixed amount given by the government. That is, paper money is directly linked to gold. However, this system is no longer in use by any of the governments. Instead, it is completely replaced by fiat money, which is the money/ currency accepted for payment by the order of the government.?

Effects:?

It can cause various socio-economic impacts that can adversely impact society. It can lead to a wage freeze and a vigorous rise in unemployment. Household income and power consumption can decline. The purchase of other economic goods can have a sharp decline as well.?

The effects of Stagflation can be pretty well understood by the Misery Index.?

Misery Index- It is a measurement of the disadvantages and distress caused to the everyday life of people, due to the positive or the risk of unemployment along with the rising Living cost and expenses of daily use commodities. The Misery Index is calculated by adding the inflation rate to the seasonal unemployment rate. This value represents the actual economic health.?

Misery Rate = Seasonally adjusted Unemployment Rate + Annual Inflation Rate

Prevention:?

There's no certain solution to Stagflation. However, improvement in monetary policies and fiscal policies can help a lot. But, this isn't as easy as said.?

• Productivity needs to be increased to a certain level where the economy grows simultaneously without adding to inflation.
• A government may help to ease a recession by pumping more capital into the economy to reduce interest rates and stimulate consumption.
• Economists believe that the bank must seek to maintain price stability to keep inflation from spiraling out of control. The free market would distribute labor to its most productive uses if the government deregulated the economy.
• Stagflation may be explained by supply shocks, and governments must intervene to remedy the supply shock without causing unemployment to grow too rapidly.

Conclusion:?

Stagflation may not occur frequently, but it can strike at the very bottom of the economic tree. It's a major issue that economists and the government must confront. To avoid such a circumstance, plans should be prepared ahead of time. Because, if it occurs, it will open the door to a slew of other issues that are either directly or indirectly tied to the economy.