STAGFLATION

"Stagflation" is a combination term, bringing together two words, "stagnation" and "inflation." In economic terms, stagflation exists when there is slow or no growth in the real (inflation-adjusted) economy, accompanied by economic inflation (rising prices). A period of stagflation exists, for instance, when unemployment rates are high and the rates of inflation of products are also high. In 1982 the Council of Economic Advisers reported that there was no known reason to expect any regular or systematic association between the unemployment rate and the average rate of price-level change (inflation). The term came into existence during the 1970s, when the effort to reduce high inflation by trading inflation for increased employment actually resulted in both more inflation and rising unemployment: stagflation. Some economists argued that a permanent reduction in inflation brings about a permanent rise in the rate of unemployment, a famous economic tradeoff implied by the 'Phillips Curve,' developed by English economist A.W. Phillips. Phillips' theory was based on his study of English unemployment between 1862 and 1957, where it appeared that any economy would need to accept some growing rate of reasonable inflation in order to lower unemployment. The Phillips Curve data has never been proven to be accurate, according to data gathered in the United States, and the rare and episodic economic conditions of stagflation are still not clearly understood, except that the effort to reduce inflation by artificially increasing employment is by no means reliable, and may result in the paradoxical situation of stagflation, where prices on consumer items increase, but consumers are unable to afford the higher prices.