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Stagflation

Stagflation refers to persistent high inflation coupled with high unemployment and stagnant demand /growth in economy.

High Inflation + Low Economic Growth {or conditions of recession} + Low Employment Generation = Stagflation

Stagflation generally occurs because recession reduces demand for goods. In the post 2008 crisis years, slowdown in growth and investment was accompanied by elevated levels of consumer price inflation in India. This condition was called stagflation.

Implications of Stagflation for policy making

Stagflation is considered to be a problematic condition for governments to handle. This is because; it presents a situation when despite of low demand the prices keep going up. When an economy is in recession, the governments try to revive the economy by cutting interest rates or increasing government spending to put boost the demand, which leads to inflation. However, these inflationary measures cannot be applied in stagflation because inflation is already very high and such measures would further result in prices spiralling out of control

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