what causes stagflation 
there is no real consensus among economists about the causes of stagflation they have put forth several arguments to explain how it occurs even though it was once considered impossible one theory states that stagflation is caused when a sudden increase in the cost of oil reduces an economy s productive capacity the oil crisis of the 1970s is the prime example in october 1973 the organization of petroleum exporting countries opec issued an embargo against western countries this caused the global price of oil to rise dramatically therefore increasing the costs of goods and contributing to a rise in unemployment 7because transportation costs rose producing products and getting them to shelves became more expensive and prices rose even as people were laid off from their jobs critics of this theory point out that sudden oil price shocks like those of the 1970s did not occur in connection with any of the simultaneous periods of inflation and recession that have occurred since the embargo 8another theory is that the confluence of stagnation and inflation is the result of poorly made economic policy harsh regulation of markets goods and labor in an otherwise inflationary environment are cited as the possible cause of stagflation some point to former president richard nixon s policies which may have led to the recession of 1970 a possible precursor to other periods of stagflation nixon put tariffs on imports and froze wages and prices for 90 days in an attempt to prevent prices from rising 9 once the controls were relaxed the rapid acceleration of prices led to economic chaos while appealing this is an ad hoc explanation of the stagflation of the 1970s which does not explain later periods that showed a simultaneous rise in prices and unemployment other theories point to monetary factors that may also play a role in stagflation nixon removed the last indirect vestiges of the gold standard bringing down the bretton woods system that had controlled currency exchange rates 10this decision removed commodity backing for the currency and put the u s dollar and most other world currencies on a fiat basis ending most practical constraints on monetary expansion and currency devaluation stagflation vs inflationwhatever the explanation we have seen inflation persist during periods of economic stagnation since the 1970s even before the 1970s some economists criticized the notion of a stable relationship between inflation and unemployment they argue that consumers and producers adjust their economic behavior to rising price levels either in reaction to or in expectation of monetary policy changes as a result prices rise in response to expansionary monetary policy without any corresponding decrease in unemployment while unemployment rates rise or fall based on real economic shocks to the economy this implies that attempts to stimulate the economy during recessions could simply inflate prices without promoting real economic growth urbanist and author jane jacobs saw the disagreements between economists on the causes of the stagflation of the 70s as a misplacement of scholarly focus on the nation rather than the city as the primary economic engine she believed that to avoid the phenomenon of stagflation a country needed to provide an incentive to develop import replacing cities that is cities that balance import with production this idea essentially the diversification of the economies of cities was critiqued for its lack of scholarship by some but held weight with others 1112special considerationsthe de facto consensus on stagflation among most economists and policymakers has been to essentially redefine what they mean by the term inflation in the era of modern currency and financial systems persistently rising price levels and falling purchasing power i e inflation are just normal conditions of good and bad economic times economists and policymakers generally assume that prices will rise and largely focus on accelerating and decelerating inflation rather than on inflation itself the dramatic episodes of stagflation in the 1970s may be historical footnotes today but since then simultaneous economic stagnation and rising prices appear to be part of the new normal of economic downturns 