Stagflation

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Nathaniel Port

Stagflation is a condition in a given economy during which there is significant economic stagnation, coupled with inflation. It was coined in the 1970s when rising oil prices led to high inflation and low GDP growth rates in much of the developed world.

The name, "Stagflation" is a contradiction in terms. Until the oil crises in the 1970s there had never been a period in U.S. economic history when inflation and economic stagnation coexisted. A.W. Phillips an economist, developed a thesis built upon a curve of employment and inflation (appropriately named The Phillips Curve). His theories were commonly accepted in the 1960s.

The Phillips Curve indicated that the rate of inflation and the level of employment were inversely proportional; that prices rose during periods of full-employment (generally believed to be about 5%) and fell when unemployment increased. The position was perfectly understandable; when workers are laid off, they tend to depress demand for goods and services. And when they are reemployed, they can spend disposable income which increases aggregate demand.

However, oil prices rose from $5 to $30 per barrel after the Arab Oil Embargo, causing prices to rise in the face of falling demand generally believed to be due to worker layoffs. At one point in the 1970s, inflation was running at 9% with a 9% unemployment rate. That had never happened before. Some economists believed that oil prices rising at a time when productivity rates were declining caused "Stagflation."