Stagflation environment and definition The combination of stagnation in the economy with inflation is called “stagflation”. Stagflation has been effective as an economic disease in certain periods throughout the history of modern economics. Typically, in a stagflation environment, economic growth slows, unemployment rises, and inflation rises. If we think on the basis of the global economy; The global supply problem, which came into play as an after-effect in the post-Covid recovery process, brought growth concerns back to the agenda and "stagflation" comments increased as the supply shortage was also subject to inflation. Here too, historically; It has an important reflection in the economy of the 1970s, when the devastating effect of oil prices was felt.
Geopolitical troubles and tightening policies Inflation and global supply shortages triggered by the war with Russia and Ukraine worsened the situation in terms of supply chain disruption and negative impact on production. It is possible to say that the measures under the zero Covid policy in China also add additional difficulties to the supply chain. In an environment of inflation asymmetry, Central banks' weighting on tightening policies may cause this effect to shift more actively to stagflation, where, in fact, the characteristics of stagflation will differ from each other, either descriptively or qualitatively. Namely;
Inflation rates are expected to decline next year due to policy or base effects. However, this does not mean that we will immediately see 2% inflation in developed countries. In addition, even if inflation rates decline, monetary policies will not have a direct effect on the price pressure of uncontrolled supply factors. Therefore, it is possible that the group of energy-dependent countries within the range of a geopolitical crisis such as the Euro Zone may not fall in inflation rates and enter into a cycle of economic contraction despite increasing interest rates. The Fed, on the other hand, is not currently considering the impact of a long-term recession within the framework of a US economy that can profit from the situation by compensating the effects of the energy crisis with local resources and selling its own energy to dependent Europe, and can focus on inflation.
USA 2-10 year yield spread, 5-30 year yield spread, GDP growth and CPI comparison
Policies against stagflation In the context of supply-based factors, central banks' compliance with economic management has a primary impact; In the secondary effect, there should be a strategy based on the effect of the inflation outlook on the pricing behavior. In terms of the demand factor, on the other hand, funding conditions should be determined according to market conditions by avoiding the policy width that will further heat inflation. Since inflation and growth are not normally compatible economic targets, all conditions, including cyclical economic factors, must be analyzed to find the equilibrium point. In its simplest form; You lower interest rates to increase growth (loose), raise interest rates to reduce inflation (squeeze). In the process of reducing inflation, the more severe the situation, the less popular policymakers may be in the recycling process. Therefore, it is important to implement a good economic policy at a wide level and to analyze the needs and priorities of the economy in the right order. In a properly managed economy, shocks are also easier to manage.
Conclusion? Today, although the views on the prioritization of growth and inflation differ from each other, the prevailing opinion is that inflation should be reduced for sustainable growth dynamics. In this respect, it is considered a rational practice to bring price stability to the desired level by controlling monetary policy instruments, suppressing demand and secondary effects, then normalizing conditions and paving the way for growth.
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