Could Stagflation Reoccur?

A reader asks:

Can you write a bit about Stagflation? It seems inevitable.

Stagflation is when the economy experiences slow GDP growth (stagnation) with high inflation. The term was coined in the 1970's, when there were six quarters of negative GDP growth, and inflation reached 12%.

Stagflation in the 1970's was caused by three factors:

1. A sudden increase in global liquidity when the U.S. went off of the gold standard.
2. Stop-go monetary policy, which confused price-setters, contributing to sticky inflation
3. Wage-price controls, which disrupted the economy's ability to correct itself.

Stagflation could reoccur, but not to the same extent. Global liquidity has increased, thanks to new banking products, such as Collateralized Debt Obligations, (CDO's). However, central banks learned from the '70's, and now only change monetary policy gradually. Furthermore, wage-price controls have been abandoned.

Related Articles

• Stagflation
• Historical Fed Funds Rate
• Current GDP Growth