News:India’s retail price inflation has jumped to a 40-month high at a time when India’s growth has slowed down to a six-year low.This has prompted some economists to warn that the country could be entering into a stagflationary phase.
- The term Stagflation was first coined by Paul Samuelson who was the first American to win the Nobel Prize in economics.
- Stagflation is a condition of slow economic growth and relatively high unemployment, or economic stagnation, accompanied by rising prices, or inflation.
- It can also be defined as inflation and a decline in the gross domestic product(GDP).
What causes Stagflation:
- The most analysed episodes of stagflation is the one in the US that began in 1974 and ended in the early 80s.
- It was set off by a series of supply shocks led by surging oil prices and an excessively expansionary monetary policy especially in 1972-73, which allowed expectations of inflation to become entrenched.
- This led to a breakdown of the inverse relationship between inflation and unemployment as suggested by the Phillips Curve.
About Phillips Curve:
- Phillips curve is a graphic curve which advocates a relationship between inflation and unemployment in an economy.
- As per the curve,there is an inverse relationship between inflation and unemployment.
- The concept states that with economic growth comes with inflation which in turn should lead to more jobs and less unemployment.