Agricultural Economics Department

 

Date of this Version

4-16-2008

Comments

Published in Cornhusker Economics, 4-16-08. Produced by the Cooperative Extension, Institute of Agriculture and Natural Resources, Department of Agricultural Economics, University of Nebraska – Lincoln. http://www.agecon.unl.edu/Cornhuskereconomics.html

Abstract

Within the past few months, there has been a substantial increase in the news media’s use of the term “stagflation” in reference to the future of the U.S. economy. Economists use stagflation to refer to a prolonged period characterized by both stagnation, represented by slow economic growth and high unemployment, and inflation, which is an increase in the general price level.

Stagflation was an important economic problem for many countries during the 1970s. In the United States, stagflation is associated with the 1973 oil embargo, which brought skyrocketing energy prices. Although the embargo was lifted in 1974, its effects persisted well into the 1980s. During that period of stagflation, unemployment ranged from 4.9 percent to 9.7 percent and inflation ranged from 5.8 percent to 13.5 percent. The so-called “misery index,” the simple sum of the unemployment and inflation rates used to gauge the economic and social costs to the nation, ran in double digits, reaching as high as 20.8 in 1980.

According to economists, there are two possible causes of stagflation. It can be caused by an adverse supply shock, such as a substantial increase in the price of imported oil. The increase in the price of such an important input raises the general price level while simultaneously slowing economic growth by making the production of goods and services less profitable. Stagflation can also be caused by government policies. For example, a government can slow economic growth by overregulating markets. Then, in an attempt to stimulate the economy, the central bank can allow too much expansion of the money supply, resulting in inflation. The stagflation of the 1970s is usually attributed to both these causes. It began, in large part, because of a substantial increase in oil prices but continued as central banks overstimulated the economy in an effort to avoid recession, leading to a continuing upward spiral of wages and prices.