Stagflation is a situation wherein there persists both inflation(consistent rise in the prices of all the goods and services available in a country) as well as stagnation(lack of any economic development). Since 1970, there have been paradoxical developments in most developed nations of the world. There has been a considerable fall in the level of production and employment on one hand, and rise in the general price level on the other. That is nothing but inflation and stagnation coexisting. Inflation and unemployment are mutually exclusive economic phenomena. There has always been an trade off between these two in an economy. Thus, when both of this coexist, it leads to the rise of a paradoxical situation called Stagflation.

The features on stagflation include:

• Rise in general prices.
• Rise in the wage rate.
• Reduction in the level of demand for goods and services.
• Reduction in the level of production.
• Emergence of excess capacity.
• Increase in involuntary unemployment (a situation wherein people are willing to work at the prevailing wage rate but do not get any work).

Causes of stagflation:

• Increase in the supply of money.
• Rise in wage rates under pressures from trade unions.
• Consistent rise in agricultural prices, owing to the government policy.
• Rise in administered prices.
• Credit expansion by the banks.
• Increase in saving and investment.
• Reduced demand for labor resulting in unemployment.
• Rise in prices of petroleum and coal.
• Increase in industrial capacity.

Stagflation is certainly a more difficult proposition than inflation. In the words of Haberler, “The combination of unemployment and inflation is a very delicate matter, if we fight recession, we stimulate inflation and if we fight inflation, we stimulate recession.

Some measures to control stagflation:

• Creation of bank credit and supply of money must be checked.
• Excise duty and other indirect taxes need to be reduced to stimulate production.
• Consumption level is to be very carefully encouraged.
• Labour intensive enterprises are to be encouraged to stimulate employment.
• Appropriate income policy needs to be pursued to strike against the problem of inflation.
• Wage rate must be suitably regulated.

Stagflation not only causes economic unrest but also leads to social instability. There are many instances where the rich gets richer and the poor gets poorer. There seems a moral dispute within the people resulting in hoarding, black marketing ,etc. Thus, stagflation is an serious economic hindrance which needs to be kept in check.