When the Economy Stagnates but Prices Rise: Understanding Stagflation

Stagflation emerges as one of the most adverse scenarios for an economy: economic growth slows down or contracts, while simultaneously the prices of goods and services experience sustained increases. Picture a landscape where business activity loses momentum, reducing demand and consequently the supply of jobs. With fewer job opportunities available, people's purchasing power decreases, creating a vicious circle of lower circulating money. Paradoxically, in this same context of stagnation, inflation continues its upward march, making every everyday purchase—from food to fuel—more burdensome.

The Mechanisms Behind Stagflation

There is no single cause that originates this economic disruption. In some cases, it responds to imbalances in the mechanisms of monetary circulation. In others, external factors such as abrupt increases in the cost of oil can trigger production costs, which companies pass on to consumers through price increases. This dynamic transforms daily life into a constant struggle against the erosion of buying power, especially when job opportunities are scarce. In severe situations, stagflation can precipitate deeper financial crises, affecting entire economic systems.

The Challenge of Corrective Policies

Stagflation presents a complicated dilemma for governments and central banks: conventional economic stimulus tools—such as lowering interest rates or increasing public spending—can be counterproductive when prices are already on the rise. Economic policymakers must design sophisticated strategies that simultaneously reactivate productive activity and contain inflationary pressure. This search for balance resembles an act of tightrope walking, where a mistake in either direction can exacerbate the situation.

Stagflation in Historical Perspective

The 1970s of the last century constitute the most emblematic episode of stagflation on a global scale. During that period, oil shocks, disruptions in supply chains, and excessively permissive monetary policy converged to create an unprecedented economic environment. Authorities faced significant difficulties in articulating effective responses, consolidating the decade as a benchmark in economic history. This historical episode of stagflation illustrates the inherent complexities of simultaneously managing inflation and stagnation, lessons that remain relevant in contemporary economic analysis.