From UPSC perspective, the following things are important :
Prelims level : Stagflation
Mains level : Read the attached story
India’s economy is better placed than many other countries to avoid the risk of potential stagflation worldwide, said the Reserve Bank of India Deputy Governor.
Why in news?
- Stagflation remains a risk to the US economy, and there are similarities between the situation in the 1970s and today, a/c to World Bank.
- Surging prices for oil and food are pushing up the cost of living, and business executives are voicing concerns about the outlook for the economy.
What is Stagflation?
- Stagflation is a stagnant growth and persistently high inflation. It, thus, describes a rather rare and curious condition of an economy.
- Iain Macleod, a Conservative Party MP in the United Kingdom, is known to have coined the phrase during his speech on the UK economy in November 1965.
What happens in Stagflation?
- Typically, rising inflation happens when an economy is booming — people are earning lots of money, demanding lots of goods and services and as a result, prices keep going up.
- When the demand is down and the economy is in the doldrums, by the reverse logic, prices tend to stagnate (or even fall).
- But stagflation is a condition where an economy experiences the worst of both worlds — the growth rate is largely stagnant (along with rising unemployment) and inflation is not only high but persistently so.
Possible reasons behind
- Volatility due to war: Global economic conditions continued to deteriorate as commodity prices and financial market volatility have led to heightened uncertainty.
- Monetary tightening: In advanced economies, the war against inflation would entail significant monetary tightening, complicating the growth-inflation outlook.
- Global slowdown: Emerging market economies grapple with the global trade slowdown, capital outflows and imported inflation.
Why is it so unpopular?
- The combination of slow growth and inflation is unusual, because inflation typically rises and falls with the pace of growth.
- The high inflation leaves less scope for policymakers to address growth shortfalls with lower interest rates and higher public spending.
Back2Basics: Inflation and its impact
- Depression: It is Economic depression is a sustained, long-term downturn in economic
- Deflation: It is the general fall in the price level over a period of time.
- Disinflation: It is the fall in the rate of inflation or a slower rate of inflation. Example: a fall in the inflation rate from 8% to 6%.
- Reflation: It is the act of stimulating the economy by increasing the money supply or by reducing taxes, seeking to bring the economy back up to the long-term trend, following a dip in the business cycle. It is the opposite of disinflation.
- Skewflation: It is the skewed rise in the price of some items while remaining item prices remain the same. E.g. Seasonal rise in the price of onions.
- Stagflation: The situation of rising prices along with falling growth and employment, is called stagflation. Inflation is accompanied by an economic recession.