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Stagflation

Stagflation is a portmanteau word used to describe a period with a high rate of inflation combined with an economic recession.

The Phillips curve, which is associated with Keynesian economics suggests that stagflation is impossible because high unemployment lowers demand for goods and services which lowers prices. This results in low or no inflation. By contrast, monetarism which argues that inflation is due to the money supply rather than to demand predicts that inflation can occur with high unemployment if the government increases the money supply.

Stagflation occurred in the economies of the United Kingdom in the 1960s and 1970s and the United States in the late 1970s, and the difficulty in fitting its existence within a Keynesian framework led to a greater acceptance of monetarist theories in the 1970s and 1980s. But some still believe in Keynesian economics, saying that there was no recession at that time. The coinage of the term has been claimed for the UK Finance Minister Iain Macleod who died in 1970.

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