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GS 3 || Economy || Banking and financial sector || Inflation

Why in news?

Stagflation is in the news due to slowdown in the Indian economy

Some basic of economy:

Philips was an economist says that in the economy any country either can control inflation or can should control unemployment

No government can together control both the issue of inflation and unemployment

In normal time: People are earning more and more money. Thus are capable of paying higher prices for the same quantity of goods, so the GDP is high and so is the inflation.

When GDP goes down there is less money in the market more unemployment is there less demand is there, less supply is there, so inflation is low

Higher is the GDP low is the unemployment, lower the GDP higher is the unemployment

Till 1970-90s there were conventional view (same type of view for a longer period of time)

Accordingly, policymakers are often advised to maintain a certain inflation rate to ensure that Unemployment is kept to a minimum and the economy is operating at full capacity.

What happened in the 1970s?

Case of OPEC: OPEC is Organisation for petroleum exporting countries. They are huge Organisation and had huge control the supply

OPEC is Organisation for petroleum exporting countries. They are huge Organisation and had huge control the supply In 1970s OPEC decided to cut supply and sent oil prices soaring across the world. As the supply reduced the prices of the goods raises

OPEC decided to cut supply and sent oil prices soaring across the world. As the supply reduced the prices of the goods raises On the one hand, the rise in oil prices constrained the productive capacity of most western economies that heavily depended on oil, thus hampering economic growth.

economies that heavily depended on oil, thus On the other hand, the oil price spike also led to inflation and commodities became more costly. During that time due to less oil supply GDP went down and inflation raise this was the rare case. This situation is called stagflation.

What is stagflation?

Stagflation is a combination of stagnant economic growth, high unemployment, and high inflation.

It’s an unnatural situation because inflation is not supposed to occur in a weak economy.

In a normal market economy, slow growth prevents inflation.

As a result, consumer demand drops enough to keep prices from rising. Stagflation can only occur if government policies disrupt normal market functioning.

Causes for stagflation:

Stagflation occurs when the government or central banks expand the money supply at the same time they constrain supply.

The most common culprit is when the government prints currency. It can also occur when a central bank’s monetary policies create credit. Both increase the money supply and create inflation .

At the same time, other policies slow growth. That happens if the government increases taxes. It can also occur when the central bank raises interest rates.

Both prevent companies from producing more. When conflicting expansionary and contractionary policies occur, it can slow growth while creating inflation. That’s stagflation.

Additional info:

Inflation : Inflation reduces the purchasing power of each unit of currency, which leads to increases in the prices of goods and services over time.

: Inflation reduces the purchasing power of each unit of currency, which leads to increases in the prices of goods and services over time. Inflation rate: The inflation rate is the percentage increase or decrease in prices during a specified period, usually a month or a year. The percentage tells you how quickly prices rose during the period

The inflation rate is the percentage increase or decrease in prices during a specified period, usually a month or a year. The percentage tells you how quickly prices rose during the period GDP: The Gross Domestic Product (GDP) is the monetary value of all finished goods and services made within a country during a specific period. GDP provides an economic snapshot of a country, used to estimate the size of an economy and growth rate. GDP can be calculated in three ways, using expenditures, production, or incomes

Mains orientation question:

What is stagflation? What are the main causes for stagflation? (200 words)