What are the effects of stagflation?
Though stagflation is rare, it has occurred in the past. The best-known example came during the oil crisis of the 1970s. The Organization of Petroleum Exporting Countries (OPEC) had embargoed oil exports to Western countries that had backed Israel in the Yom Kippur War against Syria and Egypt.
It caused such a wave that the sides signed a disengagement agreement, and OPEC lifted the embargo in March 1974. The fallout of the conflict had already compounded several socio-economic issues, such as wage freezes and rising unemployment. This caused household income, purchasing power and consumption to decline.
To avoid stagflation, governments adopt economic, monetary and fiscal policies; but they don’t always go hand in hand. There is no sure-fire way to get the economy back on track. Governments must strike a balance between lowering interest rates, increasing public spending and other ways to stimulate economic growth. However, this can actually raise inflation and increase the tax burden. So tightening monetary policy and other measures can also help put the brakes on.
