Stagflation is an economic term that is a combination of the words stagnation and inflation. Stagflation term; It is used to express periods of high inflation, high unemployment rates and slowdown in economic growth. The term originated in 1965 in a speech to the House of Commons by British Conservative Party politician Iain Macleod. According to Macleod, the period that they lived could not explain only with inflation and stagnation. He propounded the stagflation term for the period of that combination of two terms. Even in these periods so many economists declined the stagflation, Great Inflation that lived in 1970 proved that stagflation is real.
What Does Stagflation Mean?
To analyze stagflation periods we have to understand inflation and negative growth in economy. Inflation states when fiat currency goes down prices of goods and services increases. In the inflationary periods, prices of goods and services rapidly increases that you purchased when fiat currency decreases. Negative growth in economy states that gross national product decreases in a quarter term. In the stagnation or negative growth in the economy, firm's sales and revenues go down that are active in the country.
When we look at the general frame, inflation and stagnation are related to each other. In the inflationary periods, monetary supply rapidly goes up and that costs to decrease value in the fiat currency. Decreasing value in the fiat currency increases cost of production and that causes cost of consumption. Eventually, damage in the system of production and consumption causes negative growth in the economy.
Another critical point that we have to know is inflation can occur without stagflation but stagflation cannot occur without inflation.
What Causes Stagflation?
Stagflation occurs when high inflation, high unemployment and stagnation happens in the same period, indeed these three cases rarely happen together at the same time because there is a negative correlation between inflation and unemployment. In other words, when inflation increases unemployment goes down. Cause under this negative correlation is employment increases when investments and capital increases in the country and that cost increases in demand. How do these three economic cases happen together at the same time?
When we look at the causes under the stagflation, we see that there are supply shocks, fiscal and monetary policies. Supply shocks states that sudden changes in supply of goods and services, decrease or increase come up in the supply shocks. In either case, supply shocks break the equilation price of goods and services. Covid19 pandemic that in the recent time, so many people became unemployed and disequilibrium happened supply of goods and services related to health services.
On the other hand, fiscal and monetary policies that are in the hands of governments can cause stagflation. Central Banks like the FED and Central Bank of the Republic of Turkey can control supply of fiat currency. Same time, Central Banks can decrease the supply of circulation money. Also, they have the power of coinage. In this way they can apply fiscal and monetary policies. Fiscal and monetary policies have to support each other for a healthy economic circumstance. One of the big reason of stagflation is that monetary and fiscal policies are against each other. For example, governments can increase taxes and decrease household’s disposable incomes by using fiscal policy on the other hand, they can expand monetary policy to increase supply of circulation money and decrease interest rates. In these circumstances stagflation will accuring.
