Stagflation

Stagflation is an economic term coined in the 1960s and formed from a combination of the words "stagnation" and "inflation." An economy is in a period of stagflation when slow economic growth occurs along with sharp price increases.

In an economic downturn, classic economics theory holds that lowering interest rates will enable consumers to borrow more cheaply in order to purchase goods and services. This interest rate lowering should, in theory, encourage spending and help revive the economy. However, lowering interest rates also raises the potential of creating inflation, making it more difficult for consumers to purchase those same goods and services the lowering of the interest rates is designed to help them afford. The corresponding dilemma is that economic measures that are taken to reduce inflation, such as price and wage controls, often result in a weakening of the general economy. In a stagflation scenario, the central bank becomes somewhat powerless, as any action that is taken will result in one of two undesirable outcomes.

• FoxBusiness.com: Fed Chief: 'I Don't Anticipate Stagflation' (February 28, 2008)
  • Bernanke told the Senate Banking Committee that the nation is "not anywhere near" the stagflation situation of the 1970s and that, though high energy prices are creating "inflationary stress," he does not anticipate a problem with stagflation in the present economy.
• Yahoo! Finance: Worries Grow for Worse 'Stagflation' (February 26, 2008)
• The Big Picture: Open Thread: The Return of Stagflation? (February 20, 2008)
• WSJ.com: We're All Keynesians Now (January 22, 2008)
• Hennessy’s View: Economy of Swine (January 20, 2008)
• Economist.com: Stagflation? (January 14, 2008)
• Bloomberg.com: Central Banks Dance in Denial on Stagflation: Michael R. Sesit (January 11, 2008)
• Comment is free: Stagflation cometh (January 2, 2008)
• WashingtonPost.com: Playing That '70s Funk Again, but Not in a Good Way (December 30, 2007)
• The Boston Globe: Start saving, a new period of 'stagflation' may be just around the corner (April 6, 2007)
• The Motley Fool: Bernanke's Stagflation Proclamation (July 18, 2007)
• Reuters: Greenspan Sees Early Signs of U.S. Stagflation (December 17, 2007)
• Google News: Stagflation
• Topix.com: Stagflation