EDUCBA

EDUCBA

MENUMENU
  • Free Tutorials
  • Free Courses
  • Certification Courses
  • 250+ Courses All in One Bundle
  • Login
Home Finance Finance Resources Investment Banking Basics Stagflation
Secondary Sidebar
Finance Blog
  • Investment Banking Basics
    • Trust Fund
    • Short Sale in Real Estate
    • How to Invest in Stocks
    • Penetration Pricing Strategy
    • S Corporation
    • Special Purpose Entity
    • Wholesale Price Index
    • Hyperinflation
    • Stagflation
    • Capital Structure
    • Pecking Order Theory
    • Private Placement of Shares
    • What is Stock Market
    • Pyramid Scheme
    • Introduction to Stock Market
    • Fiscal Policy
    • Trust Account
    • Zombie Company
    • Aggregate Demand (AD)
    • Aggregate Supply
    • Diluted EPS
    • Limited Partnership
    • Leveraged Finance
    • Liquidation
    • Holding Company
    • Kickback
    • Kiting
    • Financial Instrument
    • Finance Charge
    • Free Cash Flow to Firm Formula
    • Personal Income
    • Enterprise Value
    • Joint Liability
    • Return on Average Equity
    • Factor Models
    • Beta in Finance
    • Leverage Ratio
    • Investment Partnership
    • Banker??s Acceptance
    • Internal Sources of Finance
    • Insolvency
    • Intercreditor Agreement
    • Forfaiting
    • Debt Restructuring
    • How to Buy Shares?
    • Indenture
    • Incumbency Certificate
    • In House Financing
    • Independent Director
    • Insourcing
    • Holding Company Examples
    • How to Get Into Project Finance
    • How to Manage Your Money
    • Finance vs Consulting
    • Agency Problem
    • Article of Association
    • Career and Scope After B.Com
    • Capital Rationing
    • Financial Guarantee
    • Corporate Governance
    • FHA Loan
    • Fannie Mae
    • Financial Market
    • Fixed Capital
    • Fixed Rate Mortgage
    • Foreign Corrupt Practices Act
    • Foreign Investment
    • Finance vs Marketing
    • Functions of Financial Markets
    • Grace Period
    • Gift of Equity
    • Greenwashing
    • Hard Money Loan
    • CFO Job Description
    • Corporate Finance vs Investment Banking
    • Corporate Finance vs Project Finance
    • Career After BFM/BAF
    • Form S-8
    • Market Cap vs Enterprise Value
    • Quantitative Analyst Career
    • Leveraged Buyout Model
    • Mistakes in Discounted Cash Flow
    • LBO Analysis
    • Golden Handshake
    • Asset Management Company?
    • Private Placement?
    • Marking to Market?
    • Horizontal Merger
    • Special Purpose Vehicle
    • What is Investment Banking?
    • Spin off vs Split off
    • Vertical Merger
    • Merger and Acquisition Process
    • Conglomerate
    • Horizontal Merger Examples
    • Amalgamation
    • LBO Financing
    • Types of Joint Venture
    • Merger
    • Acquisition
    • Greenmail
    • Reverse Merger
    • Sandbagging
    • Pac Man Defense
    • Backward Integration
    • Poison Pills
    • Green Shoe Option
    • Hostile Takeover
    • Forward Integration
    • Acquisition Financing
    • Types of Acquisition
    • Project Budgeting Template
    • Commercial Bank vs Investment Bank
    • Private Equity vs Venture Capital
    • Degree of Operating Leverage
    • Sales and Trading
    • Revenue Recognition Principle
    • Hedge Fund Strategies
    • Merger Examples
    • Vertical Integration Example
    • Vertical Merger Example
    • Financial Markets
    • Equity Examples
    • Biggest IPO's in History
    • Cross Border Merger and Acquisitions
    • Leverage Buyout
    • Mergers and Acquisitions in India
    • Project Financing in India
    • Investment Banking for Dummies
    • Equity Research Report Rules
    • Mergers and Acquisition in 2013
    • Investment Banking Band Chart
    • IPO For Investors
    • Yield Spread
    • Angel Investor vs Venture Capital
    • CFA vs CA
    • Merger vs Amalgamation
    • Joint Venture vs Strategic Alliance
    • Carees in Banking Exams
    • Facebook IPO
  • Accounting fundamentals (700+)
  • Asset Management Tutorial (200+)
  • Banking (44+)
  • Corporate Finance Basics (373+)
  • Credit Research Fundamentals (6+)
  • Economics (88+)
  • Finance Formula (386+)
  • Financial Modeling in Excel (17+)
  • Investment Banking Careers (29+)
  • Trading for dummies (69+)
  • valuation basics (27+)
  • Insurance Resources (14+)
  • Top Finance Books (7+)
Finance Blog Courses
  • Investment Banking Course
  • Mergers & Acquisition Course
  • Financial Modeling Course

Stagflation

Definition

Stagflation refers to an economic phenomenon where the timing of an increase in the inflation rate coincides with that of stagnant economic growth. The term stagflation is a combination of the words “inflation” and “stagnation.” The term was used by the 1970’s Chancellor of the Exchequer, Iain Macleod.

Stagflation

Key Highlights

  • Stagflation occurs when an economy experiences slow growth, rising unemployment, and increasing costs all at once.
  • It has been a common occurrence in the developed world since the 1970s.
  • It also has some advantages because it has a profitable effect on some securities, asset prices, and stapled goods.
  • The public, as well as the government, should research it in order to grasp how they can improve their chances for economic success.

Explanation

Stagflation was never seen as something that would occur in a real-world economy until it happened during the 1970s crisis in the West. Even the policymakers despise such a situation, and there are grave consequences if the State proves to be unable to handle the double-edged sword of the stagnant economy coupled with an abrupt increase in prices.

What causes such a unique phenomenon to occur are various reasons, out of which two that stand out the most are the supply shock and poor fiscal policies. With that said, it also has some positive connotations since it makes a profitable impact on certain bonds, commodity prices, and some stapled commodities.

While the State has its obligations to tackle the situation, stagflation should be studied by the citizens as well to understand where they can boost their opportunities for monetary success. A misery index was used to demonstrate it’s effects during the 1970s. This indicator, which was just the inflation rate plus the rate of unemployment added together, monitored how stagflation affected a country’s citizens.

Start Your Free Investment Banking Course

Download Corporate Valuation, Investment Banking, Accounting, CFA Calculator & others

Examples of Stagflation

The first ever example occurred in the United Kingdom in 1965 when Ian Macleod, a British Conservative Party member, used the term “stagflation” for the first time and warned the House Commons in the British Parliament about the gravity of the situation. This is what went in the U.K. in Macleod’s words: “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.”

A famous example is the first real-world premiere of the process, which caught the international eye. During the 1970s energy crisis, the Western world faced petroleum shortages, primarily the United States. It was around this time when the Middle East countries took a political decision to restrict trade-offs with the US, and the labor market conditions were flunking simultaneously despite an enormous amount of cash flow from the Federal Reserve.

 Causes of Stagflation

  • According to one theory, stagflation happens once a country’s economic capability for production is decreased by a sharp spike in the price of oil.
  • A classic example is the oil crisis of the 1970s, which led to a sharp increase in the price of oil on a worldwide scale, driving up the cost of commodities and fueling an increase in unemployment. Prices increased even as more people lost their jobs due to rising transportation expenses, which made it more costly to produce goods and deliver them to retail shelves.
  • Poor monetary policies can also immediately play a role in economic downfall. For example, the government can create a policy that radically increases the minimum wage limit for industrial workers without foreseeing the impact it will have on the prices of a commodity that will lead to an immediate decrease in purchasing power for those not involved in the industrial sector. 
  • Another constant theory is that of a supply shock. A supply shock is a sudden change in supply rate leading to a profound change in prices that are either causing an excessive supply or excessive demand. Excessive supply leads to losses for the producers because it exceeds way over the pace of demand, therefore threatening the employment rate in the future. Similarly, excess demand leads to scarcity due to the mediocre rate of supply, which also results in the sudden increase in prices of the aggrieved commodity, leading to a decrease in purchasing power.
  • Another reason that is significant but not vastly popular is the end of the Bretton Woods System. The Bretton Woods system used a fixed amount of gold as a standard economic unit to establish financial and commercial relations between countries like the U.S., Canada, Japan, and more. When the dollar was accepted as the direct currency for trade and measure of a nation’s economy on the grounds of the international economy, the prices of gold and oil became volatile after many years of steadiness.

Stagflation vs. Inflation

1. Meaning:

  • A prolonged rise in the overall cost of all products and services, not just a selective few, over time in an economy is referred to as inflation. Inflation results when the supply of money expands more quickly than the sector can create products and services.
  • Stagflation occurs when there is significant unemployment, slow economic development, and inflation. These economic circumstances don’t typically coexist. 

2. Impact:

  • The people most adversely affected by inflation include those who are retired and on a government pension, traders who own long-term bonds, and people with credit line debts.
  • As a result of reduced salaries and a higher chance of job loss during stagflation, consumer confidence may be affected. Higher manufacturing costs and reduced sales might hurt small businesses, resulting in lower company profits and lower stock values, which would affect investors.

3. Causes:

  • The primary cause of inflation is an imbalance between supply and demand for services and goods. Additionally, inflation will happen if the money supply expands more quickly than GDP.
  • The economy tends to slow down or “stagnate” when growing inflation is frequently followed by the Federal Reserve’s adoption of a more aggressive monetary policy, which eventually results in stagflation.

4. Duration:

  • In most of the world’s economies, inflation is, to some extent, a constant. The Great Inflation, which affected more severe settings in the US, lasted from 1965 until 1982.
  • Instead of years, stagflation is typically assessed in terms of a few months or quarters. As an extreme scenario, stagflation persisted from 1973 to 1982 in several economies.

Advantages of Stagflation

Can a citizen foresee any advantages in such adversity? While many assets tend to perish in stagflation, there seem to be some resilient entities that work their way through the situation. The following are those:

All in One Financial Analyst Bundle(250+ Courses, 40+ Projects)
Financial ModelingInvestment BankingUS GAAPCFA-Level 1 & 2
Equity ResearchM & A ModelingPrivate Equity ModelingForex Trading
Price
View Courses
250+ Online Courses | 40+ Projects | 1000+ Hours | Verifiable Certificates | Lifetime Access
4.9 (86,389 ratings)
  • A bond is a loan in which the money lender- the bondholder- for the government or a company puts an interest rate that the borrower is obliged to pay frequently until the initial amount lent is returned. The amount returned, along with the interest rate, is known as the ‘principal.’ Bonds whose interest rates are adjusted with the inflation rate tend to benefit a lot to the bondholder.
  • With producers always looking for increasing profits within the capacity of their production units, inflation offers a mandatory price rise to the commodities for a while until a balance between supply and demand is reached.
  • During inflation, a consumer’s budget is refocused solely on stapled commodities provided by the cheapest producer available in the market despite the price rise. Companies providing such commodities come from the field of healthcare, energy, and food.

Disadvantages of Stagflation

  • A country experiencing stagflation will see rising commodity prices, diminished spending power, low GDP, firm closures, a fall in consumer expenditure, and an increase in unemployment as a result of corporate layoffs.
  • Dealing with stagflation is like only choosing between the blue pill and the red pill with their setbacks. Let’s say that the blue pill helps you solve inflation but then comes the economic recession. On the other hand, if you choose a red pill to solve the employment rate, which is a key symptom of recession, it leads us back to inflation. So it’s misery not for the nation but those running the State as well. The problem of stagnation is difficult to resolve once it starts, both in social terms and budget deficits.

Tips to consider when getting your company ready for stagflation

  1. Increasing your business’ production is the best strategy for avoiding stagflation. Consider investing in equipment or software that can automate tasks to deliver the same quantity of goods or services.
  2. Look for strategies to reduce spending to counteract rising costs for labor and commodities. Finding methods to reduce expenses and counteract inflationary pressures is crucial.
  3. Ask your vendors for longer payment terms possible in an effort to increase cash flow by lowering past-due accounts receivables (AR).
  4. Take into account minimizing your debt. A debt with floating interest rates should be replaced with debt with set interest charges if the interest rate increases.
  5. A company may be positioned to withstand even the worst financial crisis if one shifts investments into relatively low but recession-proof sectors like health, basic goods, utility, and discounted retail or if one ensures personnel flexibility in the recruiting process.

FAQs

Q1. What triggers stagflation?

Answer: Stagflation is a state of affairs where there is a high level of unemployment, poor economic activity, and increasing costs. The 1970s had stagflation as a consequence of monetary, fiscal, and oil crisis policies.

Q2. Is stagflation more detrimental than recession?

Answer: Stagflation is more harmful than a recession since it indicates that both inflation and unemployment are at historically high levels.

Q3. How does stagflation differ from inflation?

Answer: Stagflation is a mix of high inflation and concurrently poor growth. Inflation is an overall upward trend in the prices of goods and services over time.

Q4. What is the Solution to Stagflation?

Answer: Stagflation cannot be cured completely. However, attempts can be made to increase productivity to a level where it will result in more growth without more inflation. As a result, it would be possible to strengthen monetary policy and control the inflationary element of stagflation.

Recommended Articles

This article explains everything about Stagflation. To know more about related topics, visit the following links:

  1. Inflation Accounting
  2.  Monetary Policy
  3. Inflation Risk
  4. Prime Rate
Popular Course in this category
Investment Banking Course (123 Courses, 25+ Projects)
  123 Online Courses |  25 Hands-on Projects |   600+ Hours |  Verifiable Certificate of Completion
4.9
Price

View Course

Related Courses

Mergers & Acquisition Course (with M&A Projects)4.9
Financial Modeling Course (7 Courses, 14 Projects)4.8
0 Shares
Share
Tweet
Share
Primary Sidebar
Footer
About Us
  • Blog
  • Who is EDUCBA?
  • Sign Up
  • Live Classes
  • Corporate Training
  • Certificate from Top Institutions
  • Contact Us
  • Verifiable Certificate
  • Reviews
  • Terms and Conditions
  • Privacy Policy
  •  
Apps
  • iPhone & iPad
  • Android
Resources
  • Free Courses
  • Investment Banking Jobs Offer
  • Finance Formula
  • All Tutorials
Certification Courses
  • All Courses
  • Financial Analyst All in One Bundle
  • Investment Banking Training
  • Financial Modeling Course
  • Equity Research Course
  • Private Equity Training Course
  • Business Valuation Course
  • Mergers and Acquisitions Course

ISO 10004:2018 & ISO 9001:2015 Certified

© 2022 - EDUCBA. ALL RIGHTS RESERVED. THE CERTIFICATION NAMES ARE THE TRADEMARKS OF THEIR RESPECTIVE OWNERS.

EDUCBA
Free Financial Modeling Course

3 Statement Model Creation, Revenue Forecasting, Supporting Schedule Building, & others

*Please provide your correct email id. Login details for this Free course will be emailed to you

By signing up, you agree to our Terms of Use and Privacy Policy.

EDUCBA Login

Forgot Password?

By signing up, you agree to our Terms of Use and Privacy Policy.

EDUCBA
Free Investment Banking Course

Corporate Valuation, Investment Banking, Accounting, CFA Calculator & others

*Please provide your correct email id. Login details for this Free course will be emailed to you

By signing up, you agree to our Terms of Use and Privacy Policy.

EDUCBA

*Please provide your correct email id. Login details for this Free course will be emailed to you

By signing up, you agree to our Terms of Use and Privacy Policy.

Let’s Get Started

By signing up, you agree to our Terms of Use and Privacy Policy.

This website or its third-party tools use cookies, which are necessary to its functioning and required to achieve the purposes illustrated in the cookie policy. By closing this banner, scrolling this page, clicking a link or continuing to browse otherwise, you agree to our Privacy Policy

Loading . . .
Quiz
Question:

Answer:

Quiz Result
Total QuestionsCorrect AnswersWrong AnswersPercentage

Explore 1000+ varieties of Mock tests View more