What is the difference between inflation and stagflation?

By Tony Daltorio AAA
A:

Inflation is a term used by economists to define broad increases in prices. Inflation is the rate at which the price of goods and services in an economy increases. Inflation also can be defined as the rate at which purchasing power declines. For example, if inflation is at 5% and you currently spend $100 per week on groceries, the following year you would need to spend $105 for the same amount of food.

Economic policy makers like the Federal Reserve maintain constant vigilance for signs of inflation. Policy makers do not want an inflation psychology to settle into the minds of consumers. In other words, policy makers do not want consumers to assume that prices always will go. Such beliefs lead to things like employees asking employers for higher wages to cover the increased costs of living, which strains employers and, therefore, the general economy.

Stagflation is a term used by economists to define an economy that has inflation, a slow or stagnant economic growth rate and a relatively high unemployment rate. Economic policy makers across the globe try to avoid stagflation at all costs. With stagflation, a country's citizens are affected by high rates of inflation and unemployment. High unemployment rates further contribute to the slowdown of a country's economy, causing the economic growth rate to fluctuate no more than a single percentage point above or below a zero growth rate.

Stagflation was experienced globally by many countries during the 1970s when world oil prices rose sharply, leading to the birth of the Misery Index. The Misery Index, or the total of the inflation rate and the unemployment rate combined, functions as a rough gauge of how badly people feel during times of stagflation. The term was used often during the 1980 U.S. presidential race.

(To learn more about inflation and stagflation, see Stagflation, 1970s Style and Inflation: What Is Inflation?)

This question was answered by Tony D'Altorio.

RELATED FAQS

  1. What's the lowest year-over-year inflation rate in the history of the U.S.?

    Learn about years with the lowest year-over-inflation in U.S. history. Read about how inflation is calculated using the consumer ...
  2. What is the difference between inflation and deflation?

    Determine how inflation and deflation affect prices and employment. Economies frequently teeter between these two economic ...
  3. Does inflation favor lenders or borrowers?

    Find out under what circumstances inflation benefits borrowers more than lenders and in which situations inflation can be ...
  4. What's the highest year-over-year inflation rate in the history of the U.S.?

    Learn about periods with the highest inflation in U.S. history and the mandated role of the U.S. Federal Reserve in controlling ...
RELATED TERMS
  1. Insurance Inflation Protection

    Insurance inflation protection is designed to allow policyholders ...
  2. Welfare Capitalism

    Definition of welfare capitalism.
  3. LIBOR

    LIBOR or ICE LIBOR (previously BBA LIBOR) is a benchmark rate ...
  4. Global Recession

    An extended period of economic decline around the world. The ...
  5. Economic Exposure

    A type of foreign exchange exposure caused by the effect of unexpected ...
  6. Heckscher-Ohlin Model

    An economic theory that states that countries export what they ...
Related Articles
  1. How Is Europe Affecting The Martkets?
    Economics

    How Is Europe Affecting The Martkets?

  2. Eyeing China? Consider These Economic ...
    Economics

    Eyeing China? Consider These Economic ...

  3. Tips To Beat Inflation For Near-Retireees
    Investing News

    Tips To Beat Inflation For Near-Retireees

  4. Inflation And Your Retirement
    Retirement

    Inflation And Your Retirement

  5. How A Limited Government Affects A Country's ...
    Economics

    How A Limited Government Affects A Country's ...

Trading Center