Economics is a series of complex calculations and predictions that must be precise to predict the future of a nation in terms of finances, GDP, and employment rate. Although it is a difficult task, it is not impossible thanks to the indicators. Various indicators such as warning of a natural disaster, building up of tension within a community, and more can be foreseen; however, uncertainty is the reality of existence. Therefore, there are certain events that are unplanned and unpredictable that can cripple the economy very quickly.
What is Stagflation?
A condition in which an economy faces slow economic growth, increased unemployment, and inflation, is considered stagflation. Interestingly, it is a portmanteau of stagnation and inflation. It is among the most feared economic states by economists because, unlike inflation where some businesses thrive, stagflation causes immense turmoil in every sector. Moreover, it is one of the rare events that is not explained even by modern economic theories. Since no one is aware of exactly how stagflation occurs, it cannot be predicted either. Despite that, there are two theories that may explain the event.
Supply Shock: According to this theory, stagflation occurs when there is an abrupt change in the supply of commodities.
Poor Economic Policies: As the name suggests, poorly laid out policies by the authorities can also result in stagflation.
Stagflation also gave rise to the misery index, which is the measurement of how poorly people are feeling during an economic crisis. The term was first introduced to the world in 1965 by Iain Macleod, a British politician. He used the word to describe inflation and increasing unemployment in the United Kingdom. While stating the economic facts, he said:
“We now have the worst of both worlds—not just inflation on the one side or stagnation on the other, but both of them together. We have a sort of ‘stagflation’ situation. And history, in modern terms, is indeed being made.”
The term was used a decade after that event by US officials to describe the 1970s recession.
Stagflation Examples in History
Oil Crisis
Perhaps one of the best examples of stagflation is the 1970s oil crisis in the United States. As the United States was enjoying economic expansion in the 1950s and 1960s after the Second World War, the government became lenient in terms of policies. It decided to stop relying on its gold reserves for the value of the American dollar. This would have not been an issue if everything kept the way it was; however, the Organization of Petroleum Exporting Countries decided to place a ban on the export of oil in the western countries, particularly the United States. This occurred amidst the era of least efficient machines in the US that relied on oil to function, and as stagflation is unpredictable, the country was not prepared for this ban. Everything from manufacturing plants to automobiles was brought to a halt. Unsurprisingly, this led to companies laying off the employees, and there was a massive surge in unemployment. The government decided to implement new policies to combat the situation; however, the unemployment rate was so low that nothing worked. This massive hit to the economy made companies understand that using oil efficiently was essential.
Britain’s Stagflation
As mentioned previously, the term ‘stagflation’ was derived in the United Kingdom. While the country was facing economic hardships in the 1960s, the economy went berserk in the 1970s. Similar to the United States, Britain was riding the prosperity wave after the Second World War with minor hiccups; however, it came to an end in 1973 with the Yom Kippur War. This was the Fourth Arab-Israeli War, and it caused the oil prices to increase four times. Additionally, the colonized countries under British rule became independent, meaning no import of resources from other nations. This, combined with the miners’ strikes for a three-day week made the country face stagflation. There was a time period in history when Britain’s inflation soared to 40 percent. Although this number dropped with time, the unemployment rate was not dropping, and it remain constant at 6 percent.