The Big Read in short: The threat of stagflation and what it means for you
There was a time when many economists thought it would be impossible to have a situation where a country faced a high inflation rate while grappling with stagnant economic growth and high unemployment.
But stagflation became a bitter reality when the oil embargoes in the 1970s stalled economic growth and sent prices north.
For policymakers, dealing with stagflation is particularly difficult because the tools they use to counter one of the twin problems — high inflation or low growth — usually ends up making the other worse.
Stimulating demand and consumption, for example, would only make inflation worse. But raising interest rates to reduce inflation could hurt growth because it puts the brakes on borrowing and investment.
While the causes of stagflation remain a subject of much debate, one common theory is that it happens when an economy faces a supply shock: An unexpected event causes an important commodity, such as oil,…
