When economic stagnation meets price shocks: stagflation up close

In the 1970s, the world experienced an extraordinary economic crisis that demonstrated how devastating economic processes can occur simultaneously. Then, sudden increases in oil prices, supply disruptions, and widely implemented loose monetary policies created a perfect storm – a period that experts refer to as stagflation.

What is stagflation really?

Stagflation is an economic pathology where two bad conditions occur simultaneously. First, business activity stops growing or even contracts. Secondly, the prices of goods and services begin to rise rapidly. It's like being in a trap: your rewards remain the same, while the prices of fresh bread, gasoline, or anything else are already skyrocketing.

This phenomenon is particularly bad because people and companies do not have the simplest returns. Business in the economy is stagnant or contracting, so companies cannot create jobs. Unemployed or just regularly anxious about their positions, consumers are postponing purchases. Without the flow of goods from the consumers' side, businesses are further squeezed, and production scales and investments are declining.

How does this economic disaster begin?

Stagflation did not come from nowhere. It is usually driven by several factors. Oil price spikes are one of them. When the oil price suddenly rises (often due to geopolitical events), production costs everywhere increase: transportation becomes more expensive, energy becomes more expensive, so businesses pass these costs onto consumers through higher prices.

Another factor is supply chain disruptions. If goods cannot reach the market as quickly as needed, their shortage drives up prices. Meanwhile, a slowdown in production means fewer jobs and weaker economic activity.

Monetary policy also plays an important role. When governments spend too much money without a real economic basis, inflation rises simply because there is too much money in the market and too few goods.

Why do traditional solutions not work here?

Economists usually know how to fight stagnation: lower interest rates so that people borrow and buy more. Or create additional money that stimulates the economy. However, in stagflation, these tools do not work because the problem is different.

If you lower interest rates when prices are already jumping up, you may only further encourage inflation. The government faces a big headache: how to stimulate the economy without further increasing price growth? It's like trying to walk a tightrope – one step to the side, and down you go.

In the 1970s: a lesson from the past

The stagflation of the 1970s became the most painful lesson in the history of the economy. During that decade, the global economy was directly challenging due to the convergence of several factors. The oil embargo and spikes in oil prices increased energy costs worldwide. Along with that, loose monetary policy and supply disruptions created ideal conditions for inflation to thrive.

During that period, people truly felt anxious: jobs were scarce, and it was becoming more expensive to survive. Country after country struggled to find answers, but traditional methods were not working. In studying this historical period, it is important to understand: stagflation is not just a theoretical economic term, but a real challenge that shows how complex economic management can be.