What happens when there are stagnation and inflation at the same time?

1. ATHULYA NAIR - D-08
BHAWANA - D-10
PRIYANKA MAHARANA - D- 42
SHINDUJA R – D - 61
SWATI BAJPAI - D-64
MACRO
ECONOMICS

2. 2
STAGNATION + INFLATION = STAGFLATION
 Stagflation is an economic cycle in which there
is a high rate of both inflation and stagnation.
 Period of rising inflation, falling output and
rising unemployment.
(aka Inflationary Recession)
 First used by Lain Macleod during economic
stress in the U.K. in 1960s.
 Main Cause- Restriction in aggregate supply.

3. STAGFLATION DIAGRAM
3
If demand is increased or decreased:-
Demand
Increased
Demand
Decreased

4.  Until the 1970s, many Keynesian economists
believed that there was a stable inverse
relationship between inflation and
unemployment.
4
 According to the Keynesian school of
economic thought :
 If the economy slowed, unemployment
would rise, but inflation would fall.
 To promote economic growth a country's
central bank could increase the money
supply to drive up demand and prices.
 The growth in money supply would increase
• employment
• economic growth
Stagflation in the 1970s

5. 9
• In the 1970s,U.S entered a phase of stagflation.
• The U.S. economy in the 1970s is characterized by 4 things:
High oil prices Unemployment
Recession Inflation
• Inflation – reached an annual average of 12.4% in 1980.
• Oil supply shock and the resulting increase in the price of gasoline, caused prices to get
higher (cost push inflation).
• Milton Friedman had the solution to this stagflation problem.
Inflation is always and everywhere a monetary phenomenon.
Suggested a constrictive monetary policy to control inflation.

6. CAUSES
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 The Oil Crisis
 Nixon Wage-Price
Control
 Stop-Go
Monetary Policy
 Recession
 Inflation

7. EFFECTS
 Increased demand in the market pushed up
prices, leading to demands for higher wages,
this led to high Unemployment rates
 The government's ever-rising need for funds
swelled the budget deficit and led to greater
government borrowing
 With energy costs and interest rates high,
business investment languished and
unemployment rose to uncomfortable levels
 Cost-push inflation (occurs when
overall prices increase due to increases in the
cost of wages and raw materials)

8. SOLUTIONS FOR STAGFLATION
Government- Circulation of money
RBI- supply of money
Encourage counsumption
Reduce the tax rates which lead to rise in investments
Different policy
credit creation by RBI

9. ACTIONSTAKEN
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 Recession
 Falling productivity
 Powerful trade unions
 Raising the prices of fuel
 Coal production increased from 75mn tons to 100mn tons
 Loan from International Monetary Fund twice in a year
 Price control for different goods

10. INDIA IS NOW IN CLASSIC STAGFLATIONTERRITORY
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 Recession
 Falling productivity
 Powerful trade unions
• The slowdown is three years in the making and will require higher
liquidity and increased employment to pull us out of the quagmire.
• National Statistical Office (NSO), the Consumer Food Price Index
increased from 5.11% in September 2019 to 7.89% in October 2019.
• The retail price inflation rate reached an annual high at 4.62%.
• The recent NSO estimates of gross domestic product (GDP) for the
second quarter of 2019-20 reported a further reduction in the
growth rate of GDP to 4.5%, the lowest since 2012-13.
• It is now irrefutable that India is in a growth recession.

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India economy puzzled 2011-2013
• The current account deficit in 2011-12 was 4.2%, and the fiscal deficit was 5.9% of
GDP (against the budgeted 4.8%). Both were signs of overheating.
• consumer price inflation was almost in double digits, and every sector from
agriculture and construction to industry and services complained of labor scarcity.
• Wholesale price inflation has at last dipped to 6.6% in January, but consumer price
inflation remains sky-high at 10.8%.
• signs of an overheated economy for two years. Yet, in the same period, we have
also seen a dramatic fall in production, consumption and investment intentions,
and overall economic sentiment.
• India was showing signs of an overheated economy for two years.
• At the same time there was also a dramatic fall in production, consumption and
investment intentions, and overall economic sentiment.

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• GDP was 9.2% in 2010-11, crashed to 6.5% in
2011-12
• Private consumption this year to rise by only
4.1%, after consistently exceeding 8% in
recent years.
• How do we reconcile the data showing
overheating with data showing terrible
weakness?
Some economists claim that high inflation
proves that India is supply-constrained. But
many corporates complain of slack demand and
low capacity utilization, above all in the capital
goods sector.

13. THANKYOU !
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