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Stagflation – what is it? What does stagflation mean for the economy and consumers?

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Across Europe, inflation has risen sharply in recent months. Meanwhile, economists more and more often warn against the risk of an even more dangerous phenomenon – stagflation. What is stagflation? What are the consequences of this phenomenon for the economy and consumers?

In June, inflation in Poland reached the level of 15.5 percent. – the highest in a quarter of a century. At the same time, first the COVID-19 pandemic and then the invasion Russia to Ukraine and quickly raised by central banks interest rates provoked concerns about the emergence of long-term economic problems.

All this made it increasingly common One can hear voices about the risk of a phenomenon even more serious than high inflation – stagflation in Poland. World Bank president David Malpass alerted in June that global economies could be hit by stagflationwhich has not been there since the seventies of the last century. “Even if we avoid a global recession, the pain of stagflation could last for several years, unless supply spikes significantly,” warned David Malpass. What is stagflation?

SEE ALSO: Is Poland in danger of a recession? “Undoubtedly, we will all feel the slowdown”

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Stagflation – what is it?

Stagflation is a macroeconomic phenomenon consisting in the simultaneous occurrence in a given economy of high inflation, i.e. widespread price increase, and economic stagnation, i.e. a long period of very low economic growth. From the combination of the names of these two phenomena – stagnation and inflation – the name of the phenomenon itself was derived: stagflation.

Usually, inflation and economic stagnation alternate – in other words, inflation appears in periods of dynamic economic growth and disappears in times of recession. As The Washington Post notes, many economists over the years doubted at all that stagflation was possible, “because unemployment and inflation tend to move in opposite directions because price levels are usually driven by the level of demand in the economy, and unemployment tends to decline. when demand grows. “

For the first time, stagflation was observed in practice in the 1970s. US economy. In the following decades, this unfavorable phenomenon was also faced by, inter alia, another of the world’s largest economies, Japan.

Stagflation – consequences

The occurrence of stagflation is considered to be even more detrimental to the economy than the separate phenomena of inflation or stagnation. What does it mean in practice?

For the authorities, stagflation is a situation in which the economy is not growing, and at the same time there are serious difficulties in counteracting it. This is because in order to contain inflation, monetary policy should be tightened, e.g. interest rates should be raised, and in order to revive the economy, it should be relaxed, e.g. by lowering interest rates. As a result, there are no simple solutions to overcoming stagflation.

For businesses and consumers, stagflation is also a very negative phenomenon. It means a reduction in production and investment, an increase in unemployment, and at the same time a rapid increase in the costs of living and running a business. As prices will rise faster than incomes, people’s purchasing power will decline.

SEE ALSO: These products became more expensive. “The summit is still ahead of us”

World Bank Forecasts

Currently, the phenomenon of stagflation does not occur in Poland. According to the forecasts of the European Commission, inflation in Poland in 2022 will amount to 12.2 percent. and will be one of the highest in the EU. At the same time, however Polish GDP According to the World Bank forecasts, in 2022 it is to increase by 3.9 percent, i.e. 0.8 percentage points less than previously forecasted.

The World Bank predicts that subdued global economic growth will continue for most of this decade. His report contains several recommendations to help avoid the worst effects of the crisis: coordinated humanitarian and economic aid for Ukraine, increasing the supply of food and oil, forgiving the debt of the poorest countries, limiting the Covid-19 pandemic and accelerating the energy transformation.

SEE ALSO: Marek Belka: I am not joining the choir of good advisers. I don’t really have good news

tvn24.pl, Washington Post

Main photo source: Shutterstock

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