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Stagflation Definition

Stagflation is defined as an economic phenomenon where there is high inflation along with rising unemployment and relatively slow economic growth or recession.  In this condition, there is a slowdown in the gross domestic product (GDP) and an increase in the prices of necessary commodities. In other words, it is the economic scenario where there is co-existence of recession and inflation side by side.

The reasons for these unfavorable conditions are the government’s failure to cope with inflation, which tends towards unemployment. When the government’s policies backfire, it tends to create a contradictory course of action in an economy. Various factors like supply shocks and poor implementations of fiscal policiesFiscal PoliciesFiscal policy is a government policy that is used to control a country’s finances and revenue, and it includes various taxes on goods, services, and individuals, i.e., revenue collection. It has an impact on spending levels, so it is referred to as monetary policy’s sister policy.read more are the primary reasons for this phenomenon.

Components of Stagflation in Economics

The primary components of stagflation are mentioned as follows:

  • Inflation
  • Higher rate of unemployment
  • Low GDP
  • Recession in most of the economic activities and
  • Poor implementation of government policies

Stagflation

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Examples of Stagflation in Economics

Let’s see some examples of stagflation to understand it better.

Example #1

Suppose, the United Kingdom is experiencing a higher wage rate, higher inflation, and higher economic growth. Thus, the situation of stagflation is mentioned step by step.

  • To curve the inflation in the economy, the central bank of the country has decided to stop the supply of money within the economy.
  • Thus, the first and foremost effect would hit the consumer’s pocket. Consumers would feel the pinch and thereby consumer spending would decrease drastically.
  • Fall in consumer spending would automatically reduce demand for consumer goods and services, and hence the overall business scenario would likely dampen.
  • The firm’s profit would tend to decrease instantly and there would be cost-cutting techniques adopted by the firms.
  • Cost-cutting techniques like lay-offs which would lead to unemployment, reduction in overall productions and there will be supply cut and these would lead to a higher demand for commodities.
  • Thus, another reason for inflation would be the demand-supply mismatches. Until the new policy is adopted, the cost will remain moderately low whereas the prices will tend to remain at the same level. Thus the price gap would follow along with unemployment and recession. This situation will continue until the government policies are well implemented, and the economy revives along with corporate earnings.

Example #2

During the early 1970s, the US economy was going through a series of slowdown across manufacturing, industry, and corporate earnings. The primary reasons were due to several failures in implementing social as well as fiscal policies by the US Federal Reserve. After the boom in the 1950s and 1960s, the economy went through the nest cycle of recession, where inflation and unemployment were sustained side by side.

The supply shock occurred during stagflation. The phenomenon started with a reduction in the quantity of oil which acted as a knee jerk to the society and the price of oil went sky high. As oil is indirectly and directly related to most of the commodities, the cost of those commodities tends to rise abruptly. Due to poor implementation of fiscal policies, the economy could not stay out of the stagflation resulting in diminishing income, higher unemployment, and a decrease in corporate earnings and real income.

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Advantages of Stagflation

Some advantages of stagflation are as follows:

  • The overall expenses of the business houses tend to decrease due to cost-cutting techniques. The firm earnings tend to increase for a while when the income remains stable.
  • For the time being, the prices of the products remain the same which results in margin improvement. However, volumes tend to decrease drastically.
  • The intrinsic value of the local currency tends to increase for a while due to supply constraints.
  • Prices of commodities like gold, silver tend to rise whereas prices of aluminum tend to decrease.
  • Handfuls of traders who are trading in oil, gold, etc tend to generate huge profits due to an appreciation of the commodity prices. Whereas the general market scenario remains negative.

Disadvantages of Stagflation

Some disadvantages of stagflation are as follows:

  • The purchasing power of the general population decreases and the major part of the population spending goes to the basic commodities.
  • The prices of the commodities tend to be high when the real value of the currency is considered.
  • Demand for basic commodities stays at the same level, whereas demand for luxury items tend to diminish drastically.
  • Earnings of most of the firms tend to decrease along with margin and output.
  • Higher unemployment due to factory lay-offs and pay cuts in wages are the primary characteristics of stagflation.
  • The GDP tends to decrease as the recession takes the front seat within the economy.
  • The inflation rate increases as the prices of the commodities remain at previous levels and the real purchasing power of common people diminishes.

Limitations of Stagflation

Some limitations of stagflation are as follows:

  • Due to the stagflation earnings of the firms stay in the same range or sinks.
  • The real income of the consumer diminishes as unemployment continues to grow.
  • The government fails to eradicate inflation and revive the economy, as most of the policies implemented in an unorganized manner.
  • The flow of currency within the economy is checked by the central bank, which causes a fall in the real income of masses.
  • Inflation and unemployment remain side by side, which causes tremendous pressure to the economy.
  • Stagflation is very difficult to eliminate as contrasting characteristics do occur side by side. The central banks of each country have to take several bold steps to eradicate it fully.

Conclusion

Till 1970, economists used to believe that inflation and unemployment do not occur side by side. But after that, Keynesian economistsKeynesian EconomistsKeynesian Economics is a theory that relates the total spending with inflation and output in an economy. It suggests that increasing government expenditure and reducing taxes will result in increased market demand and pull up the economy out of depression.read more were convinced about the co-existence contradictory features like inflation and unemployment. When industrialized countries like us entered into a recession zone along with high unemployment, economists discovered that this is an uncommon scenario which is very difficult and most of the time central banks have to take severe decisions to combat the crisis. One of the major drivers of the situation is the checking of liquidity within the economy. This type of phenomenon occurs right after prolonged years of economic boom. The down cycle evolves right after the upcycle or boom in the economy. Thus stagflation remains in between the above two phenomena.

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Recommended Articles

This has been a guide to what is stagflation and it’s definition. Here we discuss components, examples of stagflation in Economics along with limitations, advantages, and disadvantages. You can learn more about financing from the following articles –


How Biden admin could see big problem from ‘stagflation’


New York Post columnist Michael Goodwin adds his analysis to the U.S. economy under President Biden’s policies. FOXBusiness
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How Biden admin could see big problem from ‘stagflation’

What causes an economic recession? – Richard Coffin


How can factors like inflation, supply and demand, and interest rates trigger recessions? Learn the economic basics of modern markets.

For millennia, the people of Britain had been using bronze to make tools and jewelry, and as a currency for trade. But around 800 BCE, that began to change: the value of bronze declined, causing social upheaval and an economic crisis— what we would call a recession today. So what causes recessions? Richard Coffin digs into the economic fluctuations that affect our modern markets.
Lesson by Richard Coffin, directed by Augenblick Studios.
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View full lesson: https://ed.ted.com/lessons/whatcausesaneconomicrecessionrichardmcoffin
Thank you so much to our patrons for your support! Without you this video would not be possible! Felipe Hoff, Rebecca Reineke, Cyrus Garay, Victoria Veretilo, Michael Aquilina, William Biersdorf, Patricia Alves Panagides, Valeria Sloan Vasquez, Mike Azarkman, Yvette Mocete, Pavel Maksimov, Victoria SolerRoig, Betsy Feathers, Samuel Barbas, Therapist Gus, Sai Krishna Koyoda, Elizabeth Parker, William Bravante, Irindany Sandoval, Mark wisdom, Brighteagle, Beatriz Inácio, Mighterbump, Pamela Harrison, Maija Chapman, Liana Switzer, Curtis Light, The Brock, Dianne Palomar, Edgar Campos Barrachina, Maria Lerchbaumer, Ever Granada, Marin Kovachev, Ravi S. Rāmphal, Penelope Misquitta, Tekin Gültekin, Jhuval, Hans Peng, Gaurav Mathur, Erik Biemans, Tony, Michelle, Katie and Josh Pedretti, Vaibhav Mirjolkar, Thomas Bahrman, Allan Hayes, Aidan Forero, Uday Kishore, Mikhail Shkirev, Devesh Kumar, Sunny Patel and Anuj Tomar.

What causes an economic recession? - Richard Coffin

Robert Kiyosaki: ‘The biggest crash in world history’ hits this October


The whole market, including Bitcoin, gold, stocks, is about to face a serious crash in October, said Robert Kiyosaki, bestselling author of “Rich Dad Poor Dad”.
Speaking to Michelle Makori, editorinchief of Kitco News, Kiyosaki explained the factors in the economy that have been leading up to this upcoming crash, and highlighted the severity of the market downturn that’s to come.
“It’s going to be the biggest crash in world history. We have never had this much debt pumped up. Debt is the biggest problem of all…the debt to GDP ratio is out of sync. So when it comes down, and it’s going to bring everything down with it, that’s when I’m going to be buying more gold, silver, and Bitcoin,” Kiyosaki said.
Follow Michelle Makori on Twitter: @MichelleMakori (https://twitter.com/MichelleMakori)
Follow Robert Kiyosaki on Twitter: @theRealKiyosaki (https://twitter.com/theRealKiyosaki)
0:00 Market crash in October
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Kitco News is the world’s 1 source of metals market information. Our videos feature interviews with prominent industry figures to bring you marketaffecting insights, with the goal of helping people make informed investment decisions.
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Robert Kiyosaki: ‘The biggest crash in world history’ hits this October

Stagflation to last next 6 months, markets in danger of sell-off – Tavi Costa


Several structural problems in the U.S. could cause a slowdown in economic growth soon, with stagflation hitting and lasting for the next six months, said Tavi Costa, portfolio manager of Crescat Capital.
“I am in the of sort of a more of a stagflationary environment in the next six months or so. It’s difficult to see stagflation over a long period of time…but it’s possible to have periods of that and I think we’re getting into one,” Costa told David Lin, anchor for Kitco News.
Follow David Lin on Twitter: @davidlin_TV (https://twitter.com/davidlin_TV)
Follow Tavi Costa: @TaviCosta (https://twitter.com/TaviCosta)
0:00 Stagflation
6:10 EM and China equities
7:38 Inflation
8:50 Gold
11:30 Miners
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18:30 1970s vs today
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__________________________________________________________________
Kitco News is the world’s 1 source of metals market information. Our videos feature interviews with prominent industry figures to bring you marketaffecting insights, with the goal of helping people make informed investment decisions.
Subscribe to our channel to stay up to date on the latest insights moving the metals markets.
For more breaking news, visit http://www.kitco.com/
Follow us on social media:
Facebook https://www.facebook.com/KitcoNews/?ref=br_rs
Twitter https://twitter.com/kitconewsnow
StockTwits https://stocktwits.com/kitconews
Live gold price and charts: http://www.kitco.com/goldpricetodayusa/
Live silver price and charts: http://www.kitco.com/silverpricetodayusa/
Don’t forget to sign up for Kitco News’ Weekly Roundup – comes out every Friday to recap the hottest stories \u0026 videos of the week: https://connect.kitco.com/subscription/newsletter.html
Join the conversation @ The Kitco Forums and be part of the premier online community for precious metals investors: https://goldforum.kitco.com/

Disclaimer: Videos are not trading advice and the views expressed may not reflect those of Kitco Metals Inc.

Stagflation to last next 6 months, markets in danger of sell-off – Tavi Costa

The Best Performing Assets for Stagflation.


Where to Invest in an era of Stagflation.
In Gold We Trust Data Chart book: https://www.incrementum.li/en/journal/the2021previewchartbookisout/
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Miles Harris offers global macro insights and champions the importance of sound money in a world gone crazy.
Subscribe to my channel on macro, money \u0026 metals: http://tiny.cc/16m5mz
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DISCLAIMER: Any advice given on my channel and videos is for information purposes only, and does not act as financial advice. Your financial decisions are your full responsibility, and if you are in any doubt, please contact a financial professional before undertaking any investment with your money or change to your financial activities.

The Best Performing Assets for Stagflation.

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