Stagflation is an economic period of rising inflation coupled with falling output which usually combines with increasing unemployment. Fewer goods and services being outputted causes fewer workers to be needed by firms - remember labour is always derived demand!
The combination of the factors above causes a squeeze on living standards as prices are increasing (Current UK inflation is around 5% but expected to peak around 7-8% later in the year) however wages are growing at a slower rate and therefore 'real wages' (Nominal wage minus inflation) begin to fall.
Stagflation causes a real policy issue for The Bank of England. The current inflation rate should cause the bank of England to introduce contractionary monetary policy - increasing interest rates to reward consumers for saving and discourage consumers from taking out loans, however increasing the interest rates would cause further unemployment and further falling of wages. At the time of writing in the UK (March 2022) The Bank of England has actually begun its process of quantitative tightening which may be further contractionary to the UK economic output.
Stagflation is a real sign of an unhealthy economy and often, external shocks. Current rises in oil and energy prices are partly to blame for the current cost of living crisis in the UK however we could argue that the UK should have been more prepared. Whilst the UK is not experiencing full blown stagflation (we still have positive economic growth) we are experiencing moderate stagflation with falling single digit economic growth.
The combination of the factors above causes a squeeze on living standards as prices are increasing (Current UK inflation is around 5% but expected to peak around 7-8% later in the year) however wages are growing at a slower rate and therefore 'real wages' (Nominal wage minus inflation) begin to fall.
Stagflation causes a real policy issue for The Bank of England. The current inflation rate should cause the bank of England to introduce contractionary monetary policy - increasing interest rates to reward consumers for saving and discourage consumers from taking out loans, however increasing the interest rates would cause further unemployment and further falling of wages. At the time of writing in the UK (March 2022) The Bank of England has actually begun its process of quantitative tightening which may be further contractionary to the UK economic output.
Stagflation is a real sign of an unhealthy economy and often, external shocks. Current rises in oil and energy prices are partly to blame for the current cost of living crisis in the UK however we could argue that the UK should have been more prepared. Whilst the UK is not experiencing full blown stagflation (we still have positive economic growth) we are experiencing moderate stagflation with falling single digit economic growth.
How Does The UK Tackle Stagflation?
- It is difficult to combat stagflation once it is happening, it really is a situation that needs to be prevented. Increasing productivity through supply side reform e.g. education and training, enables increased economic growth without the threat of increased inflation. To test this you could draw a Keynesian LRAS/AD diagram and then shift the LRAS curve to the right.
- Reduce dependence on global commodities for fuel - investment in nuclear power for instance.
