Stagflation (definition and characteristics)

The term stagflation, is the result of the combination of the words: inflation (inflation) and stagnation (stagnation).

This combination of terms was created by the then British Finance Minister Ian Mc Leod, in 1965, during his speech to the House of Commons.

After the apparent success of the Keynesian theories that originated after the great depression, it was admitted that the economic life of a country was affected by two serious situations, the first, the economic recession, clearly identifiable.ieach for negative interest rates and high unemployment rate and the second: inflation, which was directly related to the unlimited increase in prices, which led to the vertiginous impoverishment of society and the great difficulty in allocating resources and foreign exchange to the Business.

These situations are considered incongruous because they could not be penetrated within the ideal economic model and the resolutions to the Regarding this, they were the increase in interest rates, the reduction in public spending and the higher fiscal pressure, but there was no solution to the respect.

What is stagflation?

The stagflation is the paralysis of economic growth of the country accompanied by a high level of unemployment and deep inflation.

It is an economic phenomenon in which unemployment increases together with inflation and this causes demand to remain stagnant for a set period of time. Stagflation demonstrates the existence of an inoperative market because there is usually an inverse analogy between speculative pressures and unemployment rates.

It is known then as the stagnation in economic growth or decline of the economy to the root of the country's economic recession, mixed with high unemployment and deep inflation. This combination has the capacity to generate great damages that produce devastating effects on the economy of a country.

Stagflation characteristics

• Increase in prices as opposed to the decline of the economy.
• Along with the process of currency devaluation, actions are generated that lead to the consumption of currencies.
• It strongly affects the growth of all productive sectors.
• When there is stagflation, there is a total distortion of the markets.
• It entails the complete economic impoverishment of the nation that suffers from it.
• It is a completely unfavorable scenario for the welfare of society, it produces increases in the prices of products, increased unemployment and strong economic stagnation, which strongly affects the quality of life of the citizen.
• Demand stagnates due to the low purchasing power of the inhabitants.

Causes of stagflation

Specialists consider that this is a phenomenon that occurs mainly in countries with mixed economies, which apply institutional mechanisms, such as job subsidies, minimum wages, and job segmentation, to which the economy reacts in a negative.

Some of the causes of stagflation occur are:

• The untimely increase of an item or product and its by-products, which hinders supply chains, making them unprofitable.
• Poor monetary policy decisions clearly result in stagflation.
• Bad application methods to avoid inflation, which end up reducing productivity and promoting stagflation.

Consequences

• The unemployment phenomenon is getting worse.
• The prices of goods and services rise sharply.
• The recovery process of the economy is extremely slow, because a large percentage of companies suffer from stagnation and their production is affected by inflation.
• The social climate of the country becomes volatile and at the same time there is great mistrust in the markets.
• As a consequence of this, this climate of mistrust, banking entities appropriate anarchic strategies such as the exorbitant increase in interest rates and exchange rates.
• Clearly there is a distortion in the market.
• Government entities and national banking entities reflect financial deficits.
• The moment of take decisions Due to the seriousness of the situation and therefore there may be doubts when establishing regulations to correct it and the appropriate period for its application.
• The profits of the companies are highly affected and therefore the country's economy is also affected.

Measures to be taken to combat stagflation

The best measure that the state can take to combat stagflation is to apply a tax system that reduces tax expenditures, that provides legal certainty and encourages private investment, either in new projects or organizations or companies already established in the country.

With the aim that these can grow and even facilitate the growth of others through hiring smaller companies.

In the same way, reduce the tax burden for small companies or new entrepreneurs since in such serious moments for the economy, medium and small companies are key to the recovery of the country.