“what is stagflation?”. Economic stagflation combines stagnation and inflation. The term “stagflation” was coined in the 1960s by UK politician Iain Macleod. One of the best examples of stagflation is during the 1970s. During this period, several developed economies experienced slow economic growth and high unemployment (stagnation), coupled with rising prices (inflation) in the aftermath of global fuel shortages. During this period, unemployment in the US was at record levels. Also, rising oil prices and declining economic output resulted in a recessionary period of five consecutive quarters of negative gross domestic product (GDP) growth.

Furthermore, stagflation paved the way for the misery index. The misery index measures the degree of economic distress stagflation causes and how it affects people’s well-being. This is achieved by combining the current inflation rate and unemployment rate. However, the concept of stagflation was largely dismissed by academics until the 1960s. Economic theories and models of the time maintained that unemployment and inflation were mutually exclusive in macroeconomic policy.

Keynesian theories of the time suggested that any attempts to reduce inflation tended to make life more challenging for the unemployed. Also, the same theories argued that policies aiming to alleviate unemployment tended to cause inflation to rise. However, real-world data from the past century shows this not to be the case. Also, the advent of stagflation serves as a stark reminder of how widely accepted economic theories often overlook the broader effects of economic policy prescriptions.