STAGFLATION

About:

• The most difficult problem for policymakers is when inflation runs high even as economic output either stagnates or, worse, shrinks. The slowdown in economic activity, in turn, leads businesses to shed jobs and the resultant situation is termed as ‘stagflation’.
• One of the classic instances when most economies including the U.S. faced ‘stagflation’ was during the ‘oil shock’ of the early 1970s when an embargo led by the oil producers’ cartel OPEC caused the price of crude to almost quadruple in a period of just under six months.

What has sparked the latest concerns about stagflation?

• While the outbreak of the COVID-19 pandemic and the curbs imposed to contain the spread of the virus caused the first major recent economic slowdown worldwide, the subsequent fiscal and monetary measures taken to address the downturn, including substantial increases in liquidity in most of the advanced economies, fuelled a sharp upsurge in inflation.
• The ongoing war in Ukraine following Russia’s invasion of its southern neighbour and the consequent Western sanctions on Moscow have caused a fresh and as yet hard-to-quantify ‘supply shock’.