Stagflation is when the economy is experiencing rising inflation, falling economic growth or output as economists like to call it, and growing unemployment at the same time. One way we can measure stagflation is using what’s called the misery index, where you add the inflation rate to the unemployment rate.
Generally, you’ll see patterns over the last 100 years that predict it and the outcomes that flow from it when you do that. It’s usually caused by increases in raw materials, particularly oil, which means things cost more to produce and transport around, leading to higher prices in the shops. Add on top supply chain issues and supply shocks because of Brexit and Covid, and you have a heady mix of all the wrong stuff. These factors combined together have caused the inflation we are currently experiencing.
There are two types of inflation, demand-pull (good) and cost-push (bad). Cost-push inflation occurs when overall prices increase due to increases in raw materials and a higher cost of production (energy). This has a double whammy on the ordinary person in the street because inflation eats away your purchasing power at the same time as prices are rising. Moreover, the reduction in consumer spending has the knock-on effect of less money in the economy overall, which reduces ‘aggregate demand’ in economics language, eventually translating into job losses.
The problem is that governments and central banks can only solve one of two problems at a time; control inflation by raising rates or support employment by cutting rates. So policymakers have to pick the least worst direction of travel. In this instance, they’ve chosen (wrongly, in my opinion) to try and get inflation under control by raising rates, leading to increased unemployment in the future. This culminates in a recession as the negative economic feedback loop begins. Fewer jobs = less money being spent overall = fewer jobs = less money being spent overall…
However, the biggest problem we have is that you’d typically want to overcome supply chain bottlenecks, increase productivity and find cheaper alternative energy sources to try and solve this. We can’t, as we’ve just caused more supply chain issues with Brexit by making us a third country to the largest trading bloc in the world. Increasing productivity is very hard to do. Finding cheaper energy sources such as solar, wind, green gas, and hydroelectricity requires the government to commit to a green new deal that they won’t. This leaves the UK economy in a very perilous situation. Viva la revolution!
