What were the main causes of the Great Stagflation?

Question

What were the main causes of the Great Stagflation?

Answer 1

Up until the 1970s, it was generally believed that recession and inflation could not occur at the same time. A slowing economy was supposed to bring stable prices, so inflation just could not be a problem when the economy slowed. That fact gave central bankers, such as the U.S. Federal Reserve, a sure-fire method for combating high inflation: just employ tight monetary policies until inflation was choked to death. The Oil Crisis of 1973 shattered that myth and resulted in a new word in financial circles: stagflation.

The four-fold increase in oil prices imposed by OPEC in 1973-74 raised price levels throughout the economy while slowing economic growth at the same time. This left policymakers in a quandary. World central banks, worried about a severe economic slowdown, chose loose monetary policies and inflation took off.

    "The 1973 Arab oil embargo created a massive price rise and economic dislocation, from Tokyo to Paris to Chicago. The explosion in oil prices ushered in a decade of "stagflation" in which inflation soared while economies stagnated. By the end of the decade, the United States experienced double-digit unemployment, double-digit inflation and double-digit interest rates."

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