Stagflation is a term that describes a time of high inflation and weak economic growth. It is derived from the words “stagnation” and “inflation”
Stagflation is a very uncommon phenomenon, but when it occurs, it is one of the most difficult economic events for governments and central banks to deal with because traditional policy tools have little effect on either stagnation or inflation.
Inflation, as we discussed in a previous article, is the continuous rise in prices. This could be caused by a rapid increase in demand that exceeds supply (both for goods and assets). Prices will rise if the demand side rises faster than the supply side.
Stagflation, on the other hand, is particularly difficult to anticipate because it is often produced by an increase in the cost of raw materials combined with a drop in demand for goods and services. This can lead to a situation in which prices are growing but consumers are struggling to buy, and businesses are struggling to sell their products, resulting in higher cost of living, layoffs, and an increase in unemployment, which, if it continues, might lead to a recession (or even depression).
Dealing with stagflation can be difficult because typical economic solutions like raising interest rates or decreasing government spending can often exacerbate the issue. Instead, policymakers attempt to stimulate economic growth by encouraging businesses to spend and hire.
Nikos Tzivanakis 