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The Dangers of Stagflation when an economy goes into Recession while experiencing high Inflation.

Updated on August 10, 2011

Understanding Stagflation

So what is Stagflation? This is an interesting big word as far as economic terms go. It is basically comes from the words stagnation and inflation. In plain terms it describes an economy that is experiencing a recession (get it a stagnating economy) together with a high level of inflation.

A proxy figure for the seriousness of the recession is the unemployment rate. While the CPI is usually use as the proxy for the inflation rate experience by the population.

Introducing the Misery Index?

The Misery Index is a good proxy measurement for the degree of stagflation. Unfortunately it this Index seems to be coming back into fashion again.

The misery index is calculated by adding the unemployment rate with the inflation rate. Another more useful way is probably to calculated Misery Index as a product of the unemployment and inflation rate. You you think about it, intuitively the unemployment multiplies the effect of inflation and vice versa, so it makes more sense to multiply them together.


Why is it So Difficult to Solve?

The tricky thing about Stagflation is that there is no easy way out of it once the economy is already experiencing it. Trying to solve either the recession or the inflation will usually more the other thing worse.

If the government decides to stimulate the economy by increasing spending and funding it with a loose monetary policy (just a nice way of saying they will print money non-stop) then the inflation will become much worse. 

If the government tries to curb inflation by increasing the interest rate then the recession and unemployment will most likely become worse. Therein lies the dilemma. 

Learn from Stagflation in the 1970s

The double whammy of increase livestock feed cost and spike in oil prices were the primary initial causes of the high inflation in the 1970s.

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    • CHRIS57 profile image

      CHRIS57 6 years ago from Northern Germany

      Nice article, never heard of something like a misery index. Isn´t some of this aggregated into the HDI (human development index)?

      Because mans weaknesses like greed and jealusy also have to be accounted for, it could make sense to add the GINI index of inequality for better biasing.

      Good article, thank you.