The term stagflation is a recent arrival in economic literature derived from joining together the stage of stagnation and flections of inflation. The term has been coined by economists to explain the recent paradoxical inflationary phenomenon in which sustained and substantial price increases have been accompanied by declining output and rising unemployment . until recently, it was believed by economists that a simultaneous combination of high unemployment and high inflation was not possible. This peculiar and apparently inconsistent phenomenon termed stagflation has been witnessed in the recent post. During the early 1970s. Most government were under strong political pressure to adopt the expansionary programmes to reduce unemployment; and it seems likely that the eventual effect of the 1971 foreign exchange rate realignment was to encourage a higher rate of output expansion associated with a higher rate of price increase than before1971. The large and erratic changes that followed the abandonment of fixed exchange rates in 1975 acted as a check on the increase in the real output by increasing uncertainty and thus contributed to the unexpectedly severe downturn in 1975.
Restrictive financial policies adopted to curb the very rapid rates of inflation experienced in 1973and early 1974 were associated with unusually severe decline in output and employment and with little or no fall in prices and wages. In short substantial decline in output and employment coexisted with price and wage inflation in most economies, particularly in the industrially advanced countries of the world. This situation was difference from that of chronic inflation which was ubiquitous in the developing countries during the 1950s and early 1960s. stagflation which became the unwanted hallmark of the poor economic performance in the industrially developed countries during the1970s, still pervades most of these countries. Not only have inflation and recession co existed, but they have shown a clear and undisturbing tendency to breed upon one another. During 1981----83, the economic scene in the western industrial world as a whole had been dominated by the near stagnation of economic activity entailing a strong rise in unemployment with inflation persisting alongside unemployment. During 1983 for a third consecutive year, the gross domestic product(GDP) of the industrial countries experienced markedly slow real growth. In the face of near stagnation experience in the industrially developed countries, many developing countries failed to sustain their economic expansion. The severe recession in Europe hit hard the economies of the poor countries of Asia and Africa as these depended largely on their uncertain exports of raw materials. yet , inflation remained the most pervasive problem for all the developed and developing countries. In India this situation was witnessed in the recent year when on the one hand prices in the country rose while on the other hand the engineering goods and other industries substantially curtailed their output leading to substantial unemployment in the country.
It is not easy to measure the magnitude of stagflation in an economy. While it is easy to measure inflation in terms of a sole indicator the rice index recession manifests itself in several forms including the piling up of unsold stock of goods existence of idle capacity, lay off of workers, increase in the inventory accumulation with the industries etc. Most of which are not amenable to an easy measurement.