High inflation is seldom accompanied by a period of stagnation, but when the two coexist, the economy is in a state of stagflation. During these times, the prices of goods and services increase while economic growth remains sluggish and unemployment rates rise. In other words, prices are rising, and purchasing power doesn’t keep pace.
What causes stagflation?
There are competing schools of thought regarding what causes stagflation:
• Keynesian economists argue that shocks to energy or food supplies, such as increases in oil prices, cause stagflation.
• Monetarists say that stagflation is the result of a rapid expansion of a country’s money supply.
• Supply-side economists believe stagflation is the combination of tight business regulations and high taxes.