India’s economy is better placed than many other countries to avoid the risk of potential stagflation worldwide, said the Reserve Bank of India Deputy Governor.

Why in news?

• Stagflation remains a risk to the US economy, and there are similarities between the situation in the 1970s and today, a/c to World Bank.
• Surging prices for oil and food are pushing up the cost of living, and business executives are voicing concerns about the outlook for the economy.

What is Stagflation?

• Stagflation is a stagnant growth and persistently high inflation. It, thus, describes a rather rare and curious condition of an economy.
• Iain Macleod, a Conservative Party MP in the United Kingdom, is known to have coined the phrase during his speech on the UK economy in November 1965.

What happens in Stagflation?

• Typically, rising inflation happens when an economy is booming — people are earning lots of money, demanding lots of goods and services and as a result, prices keep going up.
• When the demand is down and the economy is in the doldrums, by the reverse logic, prices tend to stagnate (or even fall).
• But stagflation is a condition where an economy experiences the worst of both worlds — the growth rate is largely stagnant (along with rising unemployment) and inflation is not only high but persistently so.

Possible reasons behind

• Volatility due to war: Global economic conditions continued to deteriorate as commodity prices and financial market volatility have led to heightened uncertainty.
• Monetary tightening: In advanced economies, the war against inflation would entail significant monetary tightening, complicating the growth-inflation outlook.
• Global slowdown: Emerging market economies grapple with the global trade slowdown, capital outflows and imported inflation.

Why is it so unpopular?

• The combination of slow growth and inflation is unusual, because inflation typically rises and falls with the pace of growth.
• The high inflation leaves less scope for policymakers to address growth shortfalls with lower interest rates and higher public spending.

Back2Basics: Inflation and its impact

• Depression: It is Economic depression is a sustained, long-term downturn in economic
• Deflation: It is the general fall in the price level over a period of time.
• Disinflation: It is the fall in the rate of inflation or a slower rate of inflation. Example: a fall in the inflation rate from 8% to 6%.
• Reflation: It is the act of stimulating the economy by increasing the money supply or by reducing taxes, seeking to bring the economy back up to the long-term trend, following a dip in the business cycle. It is the opposite of disinflation.
• Skewflation: It is the skewed rise in the price of some items while remaining item prices remain the same. E.g. Seasonal rise in the price of onions.
• Stagflation: The situation of rising prices along with falling growth and employment, is called stagflation. Inflation is accompanied by an economic recession.

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