Inflation vs Stagflation: What’s the Difference?

Critics of this theory point out that sudden oil price shocks like those of the 1970s did not occur in connection with any of the simultaneous periods of inflation and recession that have occurred since the embargo. The economic theories that dominated academic and policy circles for much of the 20th century ruled it out of their models. In particular, the economic theory of the Phillips Curve, which developed in the context of Keynesian economics, portrayed macroeconomic policy as a trade-off between unemployment and inflation.

Whether or not the U.S. will experience another bout of stagflation remains to be seen. Haworth says that investors have been battling two headwinds—high inflation and rising interest rates—that don’t necessarily create a clearcut path for investing. Imagine living in an economic downturn where people are losing their jobs while bills and the cost of living keep on rising. Stagnant growth and high inflation are a killer combo that can do great damage to an economy and leave scars for decades to come. In general, the stage is set for stagflation when a supply shock occurs. This is an unexpected event, such as a disruption in the oil supply or a shortage of essential parts.

A large part of why is because price pressures left to their own devices can often be self-correcting. Consumers, investors and economists alike aren’t just worried about inflation this year — but also that even a recession won’t be able to cure it. Cost-push inflation occurred in 2005 after Hurricane Katrina destroyed gasoline supply lines in the region.

Blame Poor Economic Policies

1. In October 1973, the Organization of Petroleum Exporting Countries (OPEC) issued an embargo against Western countries.
2. While appealing, this is an ad-hoc explanation of the stagflation of the 1970s which does not explain later periods that showed a simultaneous rise in prices and unemployment.
3. This leads to layoffs and fewer job opportunities, causing unemployment to rise.
4. The Federal Reserve is tasked with keeping prices stable and unemployment low.
5. Meanwhile, a contracting economy with lots of spare capacity restrains price hikes and wage increases as demand slows.

Stagflation is a term coined in the 1970s when there was simultaneous high inflation and economic stagnation or high unemployment, according to Jonathan Wright, professor of economics at Johns Hopkins University. The Ford administration started the Whip Inflation Now (WIN) program, which involved voluntary anti-inflationary initiatives. Both Nixon’s and Ford’s attempts lowered the average consumer’s confidence, affecting high inflation rates.

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This led to higher consumer prices and an inflation rate of 11.05% in 1974, along with altering the world price of oil. In 1964, inflation was only 1%, while unemployment was at 5%, marking the last year before the stagflation occurred. This steadily rose by the mid-1960s, as the Federal Reserve implemented monetary policies that were generally thought to maintain low levels of unemployment by keeping modestly higher inflation rates. Some economists think that the time lags are shorter than they used to be.

What is stagflation, explained — and whether the crisis may return for the first time in 40 years

Those supply shocks followed a period of accommodative monetary policy in which the Federal Reserve grew the money supply to encourage economic growth. Meanwhile, global economic growth slowed sharply binomial distribution mean and variance formulas in the 1970s—a decade marked by two different recessions in the U.S. and the lead-up to a third one that began in 1980. As a result, prices rise in response to expansionary monetary policy without any corresponding decrease in unemployment, while unemployment rates rise or fall based on real economic shocks to the economy.

The Difference Between Stagflation and Recession

“Stagflation, in that sense, is more impactful on portfolios than a one-off crisis.” “Stagflation secrets of forex breakout trading finally revealed is a serious risk for investors because of its persistence,” says Michael Rosen, chief investment officer and co-founder of Angeles Investments. “That is, stagflation is rarely a transitory event and it erodes portfolio values over time, often marked by years.” Comparatively, the average length of all recessions since World War II is 11.1 months.

The term lacks a formal definition or specific threshold, but elements include how to update phone number high unemployment and a weakened economy as prices climb. And finally let’s note that there are other things happening in addition to monetary policy. The Ukraine war, supply chain problems, tax policy—all of these can add to or subtract from the employment and inflation impacts. For businesses, capital spending and inventories are sensitive to higher interest rates.