Stagflation is a term commonly heard in economics, yet it remains confusing. Among economic terms, stagflation is one of the most perplexing ones. This is because two phenomena that are normally seen as incompatible occur simultaneously: stagnation and inflation. So, what is stagflation, why does it occur, and what are the consequences of stagflation? Stagflation is a situation in the economy where there is stagnation alongside rapidly increasing prices, i.e., high inflation, low growth, and high unemployment. Typically, when the economy slows down, a decrease in inflation is expected. However, in stagflation, things go awry: both people’s purchasing power decreases and unemployment rises. Essentially, the economy gets stuck. WHY DOES STAGFLATION OCCUR? Supply Shocks (Cost Shock): Sudden increases in raw material costs, such as a sharp rise in oil prices, make production more expensive. This not only increases prices but also puts pressure on economic growth. Incorrect Monetary Policies: Central banks stimulating demand with low interest rates but without a simultaneous increase in production only inflates prices. This leads to unchecked inflation without promoting growth. Exchange Rate Shocks and Currency Crises: A drop in the local currency’s value makes imports more expensive. While costs increase, people’s purchasing power decreases, and growth slows down. Global Economic Crises: With a decrease in foreign demand, exports diminish, causing the economy to slow down. If inflation rises domestically at the same time, stagflation emerges. CONSEQUENCES OF STAGFLATION In a country’s economy where stagflation occurs, the following are typically experienced: A decrease in purchasing power, Increased unemployment, Halting of investment and production, Erosion of economic confidence, Possible rise in social unrest.