Well after a long time of silence, I return to this topic I created for students in economics. This is not the best site, but I shall try to do my best.
Now back to business! Stagflation. It is indeed a juxtaposition of two words: Stagnation and Inflation. This phenomenon occurs when an economy has both a stagnation of its national production followed by a rising inflation. If stagnation continues, the economy may slip into a phase of recession. The first time that stagflation pointed his nose was in 1972, when the oil embargo reduced the amount of oil standing a rising demand. The result is the classic case of inflation. This energy crisis which had reflected in production and therefore employment caused high unemployment rates everywhere. A more tangible example is the case of the Argentina who is experiencing a period of stagflation (high inflation combined with a decline in production).
We are going to talk about “figures”. Between 2003 and 20010 GDP experienced an average growth of 7.5%. This economic growth has been supported domestically by the demand and expansionary monetary policy. Externally, the economy boom of the nearby Brazil indirectly stimulated the economy of the Argentina. Besides, the economy managed to reach 8.9% growth in 2011.
This year, things are different! The economy contracted 0.5% in May, and this for the first time since 2009 and the average rate of inflation for 2012 is 20%. The decline in activity combined with high inflation rates are a sign of the beginning of stagflation.
Decreased economic activity + increase in the inflation rate = Stagflation
In the specific case of the Argentina how this country came to this situation? The simplest answer would be the decrease in activity and rising inflation! What is therefore the origin of lower demand and inflation?
The decline in activity comes from a decline in manufacturing production, which is the result of a decline in external demand from Brazil other nearby countries. Inflation, while was caused by a bad monetary policy of the Central Bank who is printing money to support public spending.
Good that’s for today!
picture from the patagonia region in Argentina