I’ve heard the term “stagflation” mentioned a few times in recent weeks. It is such a strange concept. It means that whilst an economy is slowing and unemployment is rising, the rate of inflation remains persistently high.
In theory, stagflation shouldn’t really exist. If we think about it logically, if an economy is slowing, then it should mean that aggregate demand is low. Consequently, it should also mean that prices should be falling rather than rising.
So, how is it even possible that prices can rise when demand is on the wane. It just doesn’t make sense. Similarly, if the rate of unemployment is rising, then shouldn’t the cost of labour fall. It doesn’t make sense that wages should rise when more people are out of work.
Whether it makes any sense or not, the world could be entering a period of stagflation. We are not quite there, yet. However, if central banks should continue with their focus...