Topic: Economics 101. Stagflation. (Read 317 times)

Because inflation has always been a monetary phenomenon, caused by money printing and too much government spending. When there's inflation, it's a symptom that there's too much supply of money in circulation. What the Central Bank does to control it is to tighten monetary policy.


It's either the Central Bank tightens aggressively to cause the recession themselves, or inflation will cause one for the Central Bank. And it's better if the Central Bank causes one early while the people still have their savings. Plus because inflation will eat up people's savings sooner or later, and when this happens, the economy will slow down, BUT inflation will still be high = Stagflation.

You have a valid question here, but the condition you explain will only happened if the world is in ideal situation, but that's not the case, nothing is ideal. Unfortunately most of the world is run in capitalistic manner, everyone looking for profit, you need money to make money, the more money you have more money you can make. Thus result in bigger economic gap. People who own most of the housing/real estate is people with much capital, all they want is to get more profit, they will not sell lower, let alone give it for free. On the other hand, the people who need the housing doesn't have enough money that is needed to buy the house. Same happened in other commodity, seller want more profit, buyer don't have enough money, and those sellers won't sell it cheaper because they already have much money it's not like they need to sell it immediately, they can wait, they think have enough money to spend until they got the ideal price.

In Argentina there's a particularly strong stagflation happening now. While a big part can be explained by "money printing"* I think there is another very important factor: inflationary inertia due to a "vicious cycle". This cycle not only includes the well known "price salary spiral" but has some more factors linked to the expectations of a continuously devaluating currency. It is composed by the following phases:

0) (see below)
1) Goods rise in price in the retail sector, because there was an increase in the wholesale price and additionally the retail merchants want to preserve their margins.
2) The consumers don't lower their consumption as they already expect price increases, instead they strive for higher salaries creating a price-salary spiral, which impacts production costs, but these cost increases alone only would explain about 30-50% of the real inflation rate.
3) When the consumers get their salary, they invest a part of it in foreign currencies (primarily the US dollar) because local currency options (like fixed bank deposits) have a meager ROI and they believe the dollar will beform better. Also, companies which import goods try to pay them as early as possible.
4) The value of the local currency decreases (compared to the dollar) due to the low demand (and high demand for foreign currencies) explained by the two mechanisms in step 3.
5) Currency devaluation leads to higher import prices, and thus goods with a high proportion of imported parts rise in price.
6) Steps 2 and 5 creates pressure to production prices, and they rise.
7) / 0) As a consequence, also wholesale prices rise.

(The cycle starts again, Step 7 is also Step 0)

While both the price-salary spiral, the currency devaluation spiral and money printing can explain about 50% of the price increase (or more, in the case of imported goods), the rest is explainable by the fact that all parts in the supply chain continuously rise their prices more than they would be forced to, to hedge against price increases in their own supply chain. So we have, in addition to these two mechanisms, a lot of small price increases have to be added, from the raw material producer to the retailer, with the wholesale sector probably being the most "greedy" because they are often big companies with high market power.

This creates an inflation inertia. Consumers (including the government) could stop it if they consumed even less, and thus price elasticity increases which makes it difficult to rise prices more. But neither the government nor private consumers have incentives to do this.

Argentina is an extreme example, but I can imagine that long-term stagflation works approximately the same in other countries too. Short-term stagflation, in contrast, is mostly caused by the factors Wind_FURY has cited in the Investopedia article.


I think what those "people in denial" criticize is more the "inflation" part than the "stagnation" part. Of course you could argue that if you had 7% inflation with some economic growth and some months later you have 5% with zero growth, then you're "tending towards stagflation". However, in this case it's likely that the inflation will continue to decrease more due to the economic slowdown, if there are no new external shocks (this could be the case due to the rising oil price for example) or if inflation inertia (like I explained) has already catched on.

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*there are three different mechanisms for that in Argentina, not only QE (Central bank buying government bonds) but also direct credits (ATs) and something called "giro de utilidades" which gives the Central Bank the option to directly "give away" money to the government as a gift in months where the currency devaluates. This is of course a quite inflationary process as it's a kind of vicious cycle.

This. Interest rates affect many Europeans's family budgets in a negative fashion. Frankly, I'm confused how rising interest rates can fight inflation? People pay more for their mortgage so they need to earn more, charge more for their work or service and voila: we get more inflation! Fuel prices are soaring too, accelerating the inflation even more. Additionally, there are rumors of the next Covid wave coming soon... so hold on to your butts, gentlemen!

It's laughable that the people I talk to that remain in denial of the high-probability of Stagflation that's going to happen in many regions around the world.

In Europe, Christine Lagarde raised interest rates again, it's the tenth hike and she won't truly confirm when she'll stop. That will slow down most European economies. But in other parts of the world, China's Stimulus and the supply cuts for Crude Oil will cause higher fuel prices and therefore more inflation.

Stagflation will not merely be a narrative.

Early signs of Stagflation appeared during the pandemic but now it's worsening considerably due to rising energy prices. The worst part is that I can't see any signs of stopping. With oil prices bound to increase even more, we can only guess where it will take us and if global economy is going to survive.

I probably didn’t pay much attention to my economic classes but, am surely paying much attention now.

I think my country has made this make with the drastic rise in oil price following the removal of the subsidy on the petroleum products. This pushed price to almost triple the formal price at an instant without any warning. This has result in citizens having to pack their vehicles and seek alternative means of movement.
The gist of transportation has gone up as well and with majority of the citizens living within the minimum wage range, it makes life extremely difficult for most people and consequently affects production.

As stated above,
The policy was instantaneous, not deliberated on and we are still having to face the adversity that comes with it while hoping on a better reinvestment of the funds that would be generated from it. We just can’t tell if that would be happening.

Still, government is looking to put in place more hikes in other sectors to ensure money is being generated without looking at production. They seem to forget this money goes in circles!

Good clarification, I agree about the EU and China. By the way, the Chinese crisis, with its development and the growth of problems in the Chinese economy, will allow neighboring countries to "intercept" not all but many directions, gaining customers who previously bought in China. China is now trying to build around itself a yuanized environment of satelite-donor countries, which clearly does not allow us to hope for their development.

Regarding military coups, I will say this - almost all such coups never bring positive economic changes. Probably the best way is the change of power by the people of the country and the transfer of powers to adequate managers (I mean the government). Yes, and the most important thing is to fight corruption. unfortunately it is a very big and complicated problem that destroys the economy of any country

Few people can ignore the word "stagflation" these days, and you've done a great job of explaining why. This unusual economic monster has puzzled researchers for decades. Check the central banks. Old tools are almost useless due to stagflation. Lowering interest rates? That may raise pricing. Raising them? Congratulations, you increased unemployment

I want to emphasize technology and robotics, which are generally disregarded. When technology develops quickly, firms deploy tools instead of people, reducing jobs. Automation makes things more efficient, which should lower prices. Unfortunately, firms don't cut prices with cost savings. Inflation and unemployment defy most economic models

Incoming Bank Of England deputy governor said, "Risks of August BOE inflation forecast to the upside". She also said, "U.K. economic activity is weak".

It would have probably more efficient of her to use one sentence, "U.K. risks of going into Stagflation".

Plus another inflationary event. That's not good for countries going into a techncial recession, https://www.livemint.com/market/commodities/oil-sizzles-at-10-month-high-on-saudi-russia-output-cuts-opec-upbeat-on-demand-brent-over-91bbl-11694526378060.html

Saudi Arabia, and Russia will cut outputs of Crude. Fuel prices will surge.

It's entirely debatable whether income inequality leads to reduced economic growth. We would need to first define what income inequality looks like because disparity in income has always existed. At its core, disparity in income is income inequality and thus it's impossible for a free and fair economy to allow everyone to earn the same income. It assumes equal skill level for every participant in the workforce. If a physician has a different and more valuable skillset than a delivery person, income disparity must exist in a free market society. Presumably, taking away wealth from the physician and handing it to the delivery person is what solving wealth inequality would look like, and I don't see why that would do anything but reduce incentive to generate wealth hence lowering GDP.

You can point to any country that's condensed the welfare state into a centralized entity through high taxes and look at their GDP growth. It's always been stagnant. Israel in the late 90's and early 2000's struggled with growth and high inflation because they had taken wealth from high income earners and put them into generous social welfare programs that gave a disincentive for Israelis entering the labor market. It wasn't until the their Finance Minister reduced the social welfare state that labor participation increased and their economy began to grow. Of course, this was off the back of liberalization of their monetary policy -- reducing tariffs and opening the country to free markets and such. Point being, they tried a wealth redistribution approach and it didn't work.

expanded economy is one of the things that should be judged on one thing. The economy is interconnected and linked to each other. We have economic sanctions that make concepts such as globalization and economic integration difficult. Therefore, it is difficult to say that the cause of stagflation is one cause, and there are factors, and each factor will affect them. .

The government's experiments in combating inflation by raising interest rates address a certain type of inflation, but the inflation that occurs is caused by different factors. treating inflation by simply raising interest rates and continuing with policies of raising interest led to the occurrence of stagflation. Instead of being a temporary stagnation, it became an increase in product prices due to fluctuating energy prices, problems. All supply chains lead to this result. The beginning of the reform will be after stopping raising interest rates.

I appreciate your responses, thank you for taking the time to write them.
That's a good point from the perspective of businesses battling inflation, I didn't take that into account.
Thank you for pointing out population growth. I guess I didn't think about it because my country's been experiencing a negative population trend for a long time. But looking at this data, there's no population growth or very low population growth (below 1.5%) in the majority of the world, including European countries, China, India, and the US. So it has to be accounted for from the long-term perspective, so some growth is perhaps required, but a year or two of no growth or very low growth shouldn't be significantly bad regarding population growth.
As for redistribution, could you mention some examples of it leading to GDP reduction? Because what I see it research that says that increase in income inequality leads to GDP reduction, but that's a very different thing because wealth redistribution is meant to reduce income and wealth inequality.

GDP growth matters because the population is growing. If GDP growth shrinks or remains stagnant with a growing population, that means lower quality of life because the amount of goods and services produced are distributed more thinly.

If you wanted to focus on redistribution, you could. That would involve taking wealth from the highest generators and giving it to those that generate less.

Historically, wealth redistribution has always resulted in a net reduction in GDP. It's not as practical as it may seem.

The current leaders are not looking or thinking of a way to improve the economy from facing Stagflation. Instead they are negleting their responsiblity on how to reduce inflation and they keep on printing money and pour into the society to decieve themselves that all is well.

They are very greedy,that they are after power and winning territories for their own selfish benefits. The third world countries are already suffering from stagflation because there is high rate of inflation,high rate of unemployment and poor productive power. Mismanagement is another factor that leads an country to Stagflation. The price of oil is really a key factor that determines the state of the country economy.

The US and EU are developed nations with a high sensitive democratic leadership so the level of unemployment and inflation shouldn't be as pronounced as it is in developing nations as for China their weak global economy and and decline in demands from other international market has been their weak spot which has affected their production strength as well as their investments.

For my own country Nigeria it is nothing other than poor leadership and undemocratic power tussle. I wish there was a global leadership overseeing the affairs of countries like this to help the mismanagement of funds and poor decision making but unfortunately there can never be. The only hope is if there will be a repetition of what played out in Garbon in Nigeria where the Military will take over power maybe stagflation could recede to a large extent

That is the fact and this statement has nothing to do with what is produced by a bad economy because everyone must try to get out of every economic problem that occurs on their own. But you also have to remember that the government has the right and responsibility to protect and prosper society even though the facts say otherwise, for poor people being able to get rice to eat is more than enough compared to talking about stagflation, recession or inflation. It's no use for them to know the causes of these three things because what they know is that making money nowadays is very difficult and most people turn a blind eye to the problems that occur and even try to oppress weak people.

Life today is on the verge of moralization and many people have never been sensitive to the problems faced by poor communities. On the other hand, the guarantee of the right to life facilitated by law seems to have disappeared because each person and the government are busy thinking about their own lives. Therefore, each individual must work better to get out of problems like this and help other people if we have the opportunity or have much better finances.

Where I'm from, a stagflation of sorts must have already come. The prices of fuel are rising pretty high and fast. Very basic necessities are getting more and more expensive. Food as basic as rice, onion, tomato, and others are rising in prices inexplicably high.

Although unemployment numbers are improving a bit, investment is plunging. Moreover, debt is rising. Debt-to-GDP ratio is already breaching a level that is worrisome. Economic policies are a bit haphazard. Even the country's top economic managers don't understand where the policies implemented are coming from and how they're crafted.

Your assessment of the situation is correct, if a company projected to grow 10% and it only grows 9% this is treated as a tragedy and it is not surprising its stock price fell many points just because of it, and this is despite the fact the company still grew, it was simply not as fast as the CEO expected.

So no growth is treated as the worst thing it could happen, but this is because of our current economic model in which governments print money at will, and in that case if your company is not in perpetual growth then you are in fact losing money, so before we can concentrate on the issue of a better wealth distribution, the whole economic system will have to change, and we are still far from this happening at all.

I believe the term "technical recession" is as old as the study of modern economics itself. If there's a recession for two consecutive quarters = it's a Technical Recession. The politicians actually are changing the official definition by not recognizing it, also telling the bureaucracy to "cook the numbers".

The term Stagflation, although a newer term, was first used during 1965. But that doesn't mean that it isn't real. We will probably hear more of the term for the last quarter of 2023 - first quarter/second quarter of 2024.