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It\u2019s generally agreed that the main cause of stagflation is a major supply shock. Things tend to get off-kilter when the supply of food, oil, or something else that\u2019s essential is disrupted and no longer able to meet demand. The situation is often made worse by poor economic policies.Supply shocks lead prices to rise, hurting businesses, consumer finances, and economic growth. Central banks respond as they normally do to economic turmoil by making sure money is cheap to borrow so they essentially feed the flames of inflation, stimulating demand and pushing prices up further.<\/p>\n<\/p>\n
Stagnation is often defined as a period in which gross domestic product (GDP) is either growing very slowly or declining, says Frank Brochin, chief investment officer of Family Office Practice at The Colony Group. When mergers and acquisitions are no longer politically feasible (governments clamp down with anti-monopoly rules), stagflation is used as an alternative to have higher relative profit than the competition. With increasing mergers and acquisitions, the power to implement stagflation increases. The term stagflation combines the words \u201cstagnant\u201d and \u201cinflation.\u201d Its first use is attributed to a British politician in the 1960s. Stagflation refers to an economy characterized by high inflation, low economic growth and high unemployment. In general, the stage is set for stagflation when a supply shock occurs.<\/p>\n<\/p>\n
The effects of stagflation were illustrated by means of a misery index. This index, a simple sum of the inflation rate and the unemployment rate, tracked the real-world effects of stagflation on a nation’s people. Jason Furman, a Harvard economist, suggests that flexibility in financial planning is critical, especially given that the Federal Reserve\u2019s monetary policy may still shift as it tries to curb inflation without stifling growth. Friedman argued that traditional expansionary policy would lead, in turn, to a permanently increasing inflation rate. He argued that the bank must work to stabilize prices in order to prevent inflation from spinning out of control.<\/p>\n<\/p>\n