An introduction to Stagflation

Due to the dynamic nature of the market, some other risk is associated with it. You might have heard about the terms like inflation which implies an increase in the rate of products beyond purchasing power, and recession which reduces the demand for the product due to oversupply, also you must have heard about the effect of inflation or recession on employment.

Other than these phenomena, there exists another situation in which the increase in unemployment is accompanied by inflation which is called ‘Stagflation’. Let’s know more about it.

What is Stagflation?

Stagflation is one such risky situation that arises with the great difference between sales and supply leading to the fall of GDP (Gross Development Product) i.e. stagnant economic growth, inflation/recession, and highly unemployed people.

The word Stagflation is the combination of ‘stagnant’ and ‘inflation’. The term was first coined by a British chancellor in 1970.

What Causes Stagflation?

‘Causes of Stagflation’ is still a subject of research, but, according to economists, it occurs due to the ‘supply shock’ or rapid increase in prices. Generally high levels of inflation lead to high levels of unemployment.

High unemployment rates are characterized by slow economic growth or economic stagnation. Hence, inflation combined with economic-stagnation causes “Stagflation”. A famous example of Stagflation is the economic crisis that occurred in 1970–1980 in the United States followed by the oil crisis.

Another reason for the cause of inflation is the creation of loose fiscal and monetary policies by government authorities in which the growth of the money supply is high or occurs too quickly while the supply is being constrained.

What Is the Cure for Stagflation?

There is no particular process or method to avoid stagflation. However, economists can make a few policies that would increase the GDP and demand for goods without leading to further inflation.

Tight fiscal and monetary policies are required to be regulated according to market dynamics which would balance the demand and supply ratio.

According to the RBI (Reserve Bank of India), 2% to 6% of the inflation rate must be maintained without disturbing the purchasing power of the buyers. This can be done by increasing or decreasing interest rates which would ultimately control the savings and expenditures.

How could stagflation affect the crypto market?

Stagflation affects the DeFi markets like any other traditional market. The increase in the rate of any cryptocurrency or any other crypto asset would reduce the purchasing power of the buyers leading to reduced liquidity and in the worst case, it may also cause the stagnation of flourishing markets as the exchange of the assets becomes non-negotiable in such cases.

Final Thoughts

Like other market risks associated with the dynamics of the market, Stagflation is also a market risk that is sometimes predictable and sometimes non-predictable. However, it can be curbed by knowing the economic changes and being updated with the latest figures. Also, if you don’t have enough knowledge then you must consult a regular and trustworthy economist to deal with such irritations prevailing in the market.