Report on

Inflated Stagnation
CONTENT

Serial Number Particulars Page Number

1 Introduction

2 Inflation

3 Indian Scenario of Stagflation

4 Causes of Stagflation

5 Analysis

6 Conclusion

7 References
ACKNOWLEDGEMENT

I would like to express my special gratitude to the Professor Dr. Shikta Singh, for giving us a
chance to have a clear understanding about the topic Inflated Stagnation. During the case
research the classroom teaching by the professor has helped me to relate the situations and to
find an answer to them. So, I would like to thank her for giving me an opportunity to tally the
classroom teaching with the real-life scenario.
EXECUTIVE SUMMARY
INTRODUCTION

Economists were well aware of the terms Inflation and Deflation, with the former meaning
sudden hike in prices and the later being characterized by steep fall in the prices of the
commodities. It was until 1970s and 1980s when the economists were bothered by the
phenomenon called Stagflation.
Stagflation is a situation where the economy faces excessive money supply and high prices on
one hand and on the other there is declining productivity and unemployment. In simple words
it can also be said that the economy becomes stagnant with prices rising high.
But it was equally difficult for economists to interpret the situation, its cause and its solutions.
The situation worsened as the unemployment rate started raising. In today’s world, the US
economy is anticipated to be confronted by Stagflation. The economists are doing their utmost
to avoid Stagflation as a whole rather than battling with inflation and unemployment in
succession. The economists like John Maynard Keynes, came out with their school of thought to
contribute significantly in studying the newly cropped up phenomenon. According to his theory,
the growth in the money supply can increase employment and promote economic growth. In
fact, stagflation is now more of a global issue- according to Randall Hinshaw, economists have
realized that full employment is more a range of NNP, than a specific point on a line. It is
preceded by Hyperinflation or prolonged period of Inflation faced by an economy. As the
economy enters this range of NNP, prices begin to rise, indicating a trade-off between
unemployment and inflation.

KEYNESIAN ECONOMICS:
Those who argued that unemployment and inflation are inversely related believe that, when
economy slows, unemployment rises, but inflation falls. Therefore, to promote economic
growth, the central bank needs to Increase the money supply in the economy to drive up the
demand and prices without stocking fears about inflation. In the 1970s, Keynesian economists
had to rethink upon their theory as the situation held them confused between growing inflation
and falling employment.

PHILLIPS CURVE:
The Phillips curve is an economic concept proposed by A. W. Phillips that states that inflation
and unemployment have a stable and inverse correlation. According to the hypothesis,
economic expansion leads to inflation, which leads to more jobs and fewer unemployment.
However, the original premise has been partially experimentally disproven owing to the
occurrence of stagflation in the 1970s, when there were high levels of both inflation and
unemployment.
Understanding the Phillips curve in light of consumer and worker expectations reveals that the
link between inflation and unemployment may not hold in the long run, and may even be
broken in the short run.
The primary premise behind the Phillips curve is that expanding economies with decreased
unemployment lead to inflation. When unemployment is low, inflation is high.

CRITISICM OF PHILLIPS CURVE:

• It may lead to mistakes.
• Market forces can better address the problem.
• It is not always fully accurate or reliable.
• There is no evidence that the theory of the Phillips curve is reliable
Fig:1 The Phillips Curve, 1961–1969

Source: Bureau of Labor Statistic

INFLATION:

Inflation is the measure of the rate of rising prices of goods and services in an economy. The
basic prices of the commodities hike up suddenly which leads to rise in the prices of all other
commodities. In such a situation, the government generally take back money from the hands of
the citizen, because more liquidity will lead to more liquidity, which will feed in to the growing
inflation. There can be many factors that determine the inflation in an economy, but the major
factors are:
1. Demand-pull: It occurs when an increase in the demand for the goods and services.
2. Cost-push: It occurs when the producers raise prices because the cost price has also hiked up.
There are a few causes of inflation, we will be discussing about them here:
1. Growing economy: A growing economy will have a growing GDP, the population will have a
rising income, with lower unemployment rate. This will bring in more purchasing power to the
hands of the citizen. So, the 8 demand for the commodity will also hike up and the money will
be circulating more in the market creating a vicious cycle.
2. Expansion of the money supply: Excess money supply can also lead to inflation as the central
bank will print more money, inducing more money into the economy, which gives more money
in the hand of the consumer with greater buying power and rising demand for the goods.
3. National Debt: When the national debt skyrockets, the government has two main options.
One is to raise taxes to make its debt payments. If it hikes corporate taxes, companies will likely
shift the burden onto consumers through higher prices. This is another scenario of cost-push
inflation.

HOW TO OVERCOME THE SITUATION OF INFLATION:

The Government takes up Contractionary monetary policies to control the Inflation:
• The Government tries to take back the extra money from the hands of the citizen.
• It sells the bonds and securities which will drag in excess funds from the economy.
• The Central bank increases the interest rates, encouraging the citizens to park their funds
into the accounts.
• The funds then are taken up by the government to invest it into infrastructural developments
as the funds will be utilized to the project which will provide a yield after a gestation period.
• The OMOs are sold to the commercial banks it controls the money supply.
• When the money supply decreases it gives the consumer less purchasing power and hence
the circulation of money in the economy reduces.

India: Infl ation rate (in%)

from 1986 to 2026
1986 8.89
1987 9.06
1988 7.21
1989 4.57
1990 11.2
1991 13.48
1992 9.86
1993 7.28
1994 10.28
1995 9.96
1996 9.43
1997 6.84
1998 13.13
1999 5.7
2000 3.83
2001 4.31
2002 3.98
2003 3.86
2004 3.82
2005 4.4
2006 6.7
2007 6.2
2008 9.09
2009 12.31
2010 10.53
2011 9.5
2012 10
2013 9.4
2014 5.8
2015 4.9
2016 4.5
2017 3.6
2018 3.43
2019 4.76
2020 6.18
2021* 5.56
2022* 4.88
2023* 4.32
2024* 4.09
2025* 4.02
2026* 4.05
0 2 4 6 8 10 12 14 16
INDIAN SCENARIO OF STAGFLATION:

After reaching rock bottom in the previous two years, the Indian economy is finally recovering.
However, some experts believe the country is experiencing stagflation due rise in inflation and
unemployment in the nation.
According to the Centre for Monitoring Indian Economy (CMIE), an independent research tank,
India’s rate of unemployment climbed over 8% in December, which is 7% higher than in 2020.

Rising inflationary tendencies took a notable substantial spike in retail inflation in December
2021, have also contributed to the issue, according to reports. However, analysts believe that
these pressures will ease in the coming months. Stagflation is described as persistently high
inflation associated with high unemployment and sluggish demand in a country's economy.
In December 2021, India's wholesale pricing index (WPI) inflation fell to 13.56 percent due to
lower fuel costs, with wholesale fuel and electricity inflation falling to 32.30 percent. In the
World Inequality Report 2022, India was listed as one of the most unequal countries, with the
wealthiest 1% of the population currently controlling 22% of national revenue and the bottom
50% having a share of only 13%." of the country's GDP.
This all Indicates that India is moving towards stagflation but this year in union budget 2022-23,
govt. of India kept the nation’s growth over fiscal consolidation. The budget continues to
emphasize boosting capital investment and incentivizing governments to do so. Large public
infrastructure expenditures have a greater multiplier and can crowd in private sector
investments as well.
This will create demand in the economy which will result in creating employment. Yet, the govt.
the plan is for the long run and we’ll see the effect in long run, there should be something that
needs to be done to see results in the short run too.

CAUSES OF STAGFLATION:

Each school of economies had their own justifications for the causes to be considered for
Stagflation, but lately agreed on two main theories- Supply stock and Economic policies to be
the main reason for driving the entire situation.
The onset of stagflation in 1970s was blamed on the US Federal Reserve’s unsustainable
economic policy during the boom years of the late 1950s and 1960s. The Fed moved to keep
unemployment low and boost overall demand for products and services in the 1960s. However,
the unnaturally low unemployment during the decade triggered something called a wage-price
spiral.
Reagan convinced Congress to reduce the top tax rate and alter tax brackets to take inflation
into account. Supply side economics relied on heavy interest rates to curb inflation and lower
taxes in order to stimulate private investments and encourage hard work. Employers used
"Reaganomics" to become more profitable by outsourcing jobs and using new technologies,
which caused many laborers, especially in the auto industry, to lose their jobs. Overall, Reagan's
economy led to greater economic inequality as the richest 1% profited and poor families
suffered.
Both the Watergate scandal and cover-ups relating to the Vietnam War (My Lai massacre and
Pentagon Papers) decreased the trust in the American government. The Iran Crisis and
involvement in Afghanistan showed the decline in American power and increased the American
public's skepticism. Economic problems caused Americans to favor lower taxes, reduced
government regulation, and social spending cuts.

ANALYSIS:

The full analysis shows that Stagflation was caused by weak monetary policy. We now expect
the US economy to enter a state of stagflation as a result of the persistent economic situation,
with the primary threat being the length of time it takes for the economy to recover, followed
by a recession, as happened in the late 1990s. Also, the main issue is if it would have a
comparable impact on the global economy, and if so, what should India do in response. For a
long time, the Indian economy has been burdened by growing inflation, with inflation expected
to reach 4.09 percent in 2021-22. Now, if the US economy enters stagflation, the following
scenarios may arise:
1. The Foreign exchange rate: In case of stagflation as we know that the growth is stagnated
and the prices are still high in the market. So, it may lead to other countries searching for
currencies other than USD to invest on.
2. Monetary policies: The US government will concentrate on working out the unemployment
as well as the inflation. The unemployment can be resolved by using expansionary policy where
as inflation can be tackled by contractionary policies.
3. Securities and bonds: It will try to sell out the bonds as to bring back the excess money from
the hands of the people.
4. Interest rates on borrowings: This is one of the major reasons why people hold on to liquid
cash in US. They have negative interest rates which keeps people away from parking in their
funds. If the rates are positive then the citizen will be encouraged to park their funds securely
with the Central bank, also the excess money will be put back into the bank. The 11
government will now be able to divert the funds collected from the citizens into other
resources and investments.

CONCLUSION:
What should India do in such a situation:
1. India should maintain its contractionary monetary policy in order to combat inflation. But
don't forget that India is still a developing country, and we need inflation to keep the economy
growing.
2. The key element that accounts for the majority of the money supply in the economy, in my
opinion, is the liquid cash in citizens' hands. It is advisable to invest a particular amount of
money from the consumer's pocket, say 10% of their salary, regardless of how small or large
the income amount is.
3. In order for citizens to invest their money with the government, the government must
establish a trust factor and pursue a program of moral inducement, in which residents are
educated about the worth of their money and how it will be directed for economic progress.
4. As more online payment methods emerge, we can observe that transactions are becoming
more properly defined, recorded, preserved, and visible. As a result, the government and the
central bank should begin to move their operations online, or at the very least make all
transactions visible, so that a good record of the currency flowing in the economy can be kept.
5. In the event of high inflation, the money supply will have to be reduced, and the central bank
will have to refrain from printing more money and putting it in the hands of citizens, thereby
increasing their purchasing power, in situations where demand for goods is higher but supply
remains constant, resulting in an increased cost price.
Across the board, inflation is related with rising prices. Inflation can be caused by a number of
things, including government policy. Even the government's efforts to control inflation can
sometimes exacerbate the problem. A little inflation, on the other hand, is a positive thing, as it
indicates that the economy is expanding.

REFERENCES:

https://dea.gov.in/data-statistics

https://www.econlib.org/library/Enc/PhillipsCurve.html

https://unemploymentinindia.cmie.com/kommon/bin/sr.php?kall=wshowtab&tabno=0001
https://www.statista.com/statistics/271322/inflation-rate-in-india/