Will Phantom Stagflation Knock on Our Door Soon?

Two basic concepts should be known in defining stagflation. The first of these concepts is inflation, which is the increase in the current price level in a given period. The second concept is recession. Recession refers to a situation in which demand decreases and the pace of economic activity slows down. According to Blinder, stagflation is the simultaneous occurrence of economic stagnation and high inflation (Blinder, 1979). According to Frisch, it is defined as an increase in the price level despite the existence of an abnormal unemployment level (Frisch, 1983). Based on these definitions, stagflation is the coexistence of stagnation and inflation, characterized by faltering capital accumulation, high unemployment, and a chronic low in capacity utilization. The existence of stagnation despite high inflation is the most important aspect of stagflation. This is evident when the inflation and unemployment rates are compared. The reason for this is that these indicators reflect how far it is from realizing the main objectives of the economic stability policy, namely "price stability" and "full employment". Stagflation was seen in developed economies as a result of the triple increase in oil prices of OPEC member countries in the 1970s. Stagflation entered the economics literature as a major threat to economies and was one of the most popular economic theories of the period since it refuted the Keynesian view that stagnation could not occur in a high inflation environment. Stagflation has been clearly felt in many countries, especially in the USA and Europe, and since the 1970s, it has been seen as a major global economic problem in the period since. All of the crises experienced by the mentioned countries caused an increase in energy resource prices inflation, unemployment, balance of payments imbalances and government debt crises, which were phenomena that put pressure on economies until the new weak economic rise of the 1990s (Romagnoli, 2022). Some researchers on stagflation risks today note similarities between the current period and the stagflation of the 1970s, including similarly negative real interest rates in both periods and the possibility of a wage-price spiral triggered by rapid wage growth (Blanchard 2022; Summers 2022).


Figure 1: 1970s People in Demonstration Against High Food Prices Carrying Signs Banners New York City, USA.

The Netherlands offers a good case study for the effects of 1970s stagflation (Oudenampsen & Mellink, 2021). It was predicted that the oil crisis would have a great impact on Dutch domestic politics. A significant increase in unemployment, slowdown in economic growth, and increasing inflation have greatly damaged business life. A few days after the embargo was announced, newspapers described the shutting down of the oil tap as a national disaster. The Dutch people endured gasoline rationing, restricted use of electricity, and the "autoloze zondag" (Hellema et al., 2004). During the "autoloze zondag" (car-free Sunday) in 1973, the effects of the oil crisis caused the Dutch government to ban automobile traffic every Sunday. People continued their daily lives without cars and highways were abandoned as the government's driving ban came into effect (Norton-Taylor, 1973).


Figure 2: A photo from the moment of the car-free Sunday.


The most important of the measures enacted to restrict the use of oil occurred as the car-free Sunday, which was put into effect at the beginning of November. At the same time, the Dutch public were asked to cut back on their energy use. In the following processes, people's continuing their daily lives without a car became more aggravated by the spatial separation of living and working, such as the accessibility crisis, and caused various problems such as on-time transportation and increased unemployment (Bek, 2022).


Figure 3: A photo from the moment of the car-free Sunday (04 November 1973).


Simultaneously with inflation in other parts of Europe, gasoline queues began to lengthen and unemployment increased. The period was also an era of strong unions, especially in Europe. Unions demanding an increase in wages to compensate for the increase in inflation took to the streets and went on strike. The winter of 1977-78 in the UK went down in history as the 'winter of discontent'(Hay, 1996).


Figure 4: Protestors, preceded by a band, getting ready to march at a demonstration against low pay in Hyde park (22nd January 1979).


Not unlike the 1970s, the winds of stagflation being felt today come from the rise n energy and raw material prices. Moreover, there are record increases not only in energy but also in all commodity groups, agriculture and metals. In addition, supply problems reinforced by the COVID-19 epidemic and increasing transportation (freight) costs create additional upward pressures on inflation. The strong increases in the prices of fossil fuels such as oil, natural gas and coal deepened the energy crisis, especially in Europe and Asia. Rising energy prices after the developments may drive inflation higher and while lowering growth in the global economy. In other words, it can be said that there are developments that can harden the stagflationist tendencies that are currently felt on a more limited scale.


The serious problems of the current global economic system started with the Global Crisis in 2008, the COVID-19 Pandemic in 2020, and the Russia-Ukraine War in 2022. With the addition of these last two, the global supply chain has been broken, and energy and food prices have risen (Guenette et. al, 2022). Throughout the crisis, central banks, especially those of developed countries, tried to prevent the crisis from killing economic vitality and causing recession or even collapse by printing money continuously. However, the great monetary expansion experienced at this time is becoming the driving force of very serious global inflation. It can be predicted that governments and central banks, which have used monetary expansion as a miraculous tool to keep economies alive, are now faced with the choice of crisis options (FAO, 2022; Anne, 2022). Before the start of the Russia-Ukraine War, global food insecurity reached record levels in 2021 due to the impact of the COVID-19 pandemic, and there was a significant increase in international food commodity prices. Due to the conflicts, Ukraine completely cut off its grain exports and Russia's restriction on grain exports from the Sea of Azov caused prices to increase even more, thus deepening the food crisis (FAO, 2022; Anne, 2022). Improper management of the food market can lead to food insecurity and deaths from food shortage. As a result of the demand for crops by the food and biofuel markets, product prices are increasing. Due to the increase in product prices, food prices increase and increasing food prices restrict access to food, especially for the poor, threatening food security (Shams et al., 2022). According to Indermit Gill of the World Bank, there is "the biggest commodity shock since the 1970s". While the IMF revised the growth expectations of 143 countries' economies downwards, this change means a phenomenon that corresponds to 86 percent of the global economy (Khemani, 2022).


Figure 5: Global Food Crisis Amid War in Ukraine


The Black Sea region has become an important global supplier of grains and oilseeds, including vegetable oils, over the past 30 years. In the early 1990s, after the dissolution of the former Soviet Union, the region was a net importer of grain. Today Russian and Ukrainian food exports constitute about 12% of the total calories traded in the world (Glauber and Laborde, 2022). In addition, the two countries are among the top five global exporters of many important grains and oilseeds, such as wheat, barley, sunflower and corn. In addition, Ukraine is an important source of sunflower seed oil, providing about 50% of the global market (Glauber and Laborde, 2022). According to the Food and Agriculture Organization of the United Nations (FAO), Ukraine has one-third of the world's most fertile land and 45% of its exports are related to agriculture; Sunflower oil, rapeseed, barley, corn, wheat and poultry exports are among the leading countries in the world. While Russia is the world's largest wheat exporter, Ukraine is the fifth largest, and these two countries have a total share of 30% in global wheat exports. Before the start of the Ukraine War, global food insecurity reached record levels in 2021 due to the impact of the COVID-19 pandemic, and there was a significant increase in international food commodity prices. Due to the conflicts, Ukraine completely cut off its grain exports and Russia's restriction on grain exports from the Sea of ​​Azov caused the prices to increase further, thus deepening the food crisis (FAO, 2022; Anne, 2022). Some current basic economic/financial indicators of selected developed and developing economies are given in the table below:

Figure 6: Heatmap - Economic Indicators by Country.

The data in Figure 6 shows that the USA, Germany, Canada, South Korea and the Euro Zone are in a state of growth with high inflation. The most feared issue for these countries is the rise in inflation despite the decline in growth. If they experience a return to shrinkage in the economy, it can be said that a recession threat may occur for the economies of these countries. Brazil and Mexico are at low growth levels despite high inflation. If the growth levels continue like this, the global economy may enter a period of stagflation. At first glance, China appears to be trouble-free, but the 4.8 percent growth rate is clearly seen as insufficient as China has a serious problem of poverty and debt. If this growth level cannot be increased, it is very real possibility that China will also face the problem of stagflation (BIS Annual Economic Report, 2022). It is also a very real possibility that Japan, which has a growth rate of 0.2 percent, will not be able to get out of the stagflation it has been experiencing for more than thirty years (Hideo, 2022). In recent years, there has been a lower limit restriction problem in European countries, such as Japan. When the sign restriction approach is considered across European countries, it has been seen that countries experiencing more technological stagnation face lower disinflation. According to this approach, it can be said that there is also hidden stagflation in Europe (Takahashi & Takayama, 2022). When it comes to economic crisis, individuals make comments according to what they see by looking at the country, their environment and economic conditions. For example, in a situation where high inflation and high growth coexist, people who are affected by high inflation but do not see much benefit from high growth interpret it as a crisis, while people who benefit from high growth argue that there is no crisis. In other words, the perception of crisis can differ according to the people and their situation. It is seen from the table that Russia and Turkey are in growth with very high inflation. It is not possible to say whether these economies are in crisis or not. As stated, the evaluations of people may change according to their perceptions. Although the two countries with the highest unemployment rates as of today are Turkey and Brazil, it has been seen in the recent past that unemployment rates in the USA and Euro Zone increase rapidly when there is a decrease in growth rates and a recession. As long as the inflation rate in Turkey is very high, the growth rate is high and the unemployment rate does not increase further, the perception of the current situation as a crisis is masked. With the effects of the pandemic, it is predicted that the risk of stagflation will affect most developed economies in the near future, not only in underdeveloped countries with economic problems. According to the predictions of Roubini and Bonatti et al. (2020), the high private and public debt that emerged in the world economy after the pandemic crisis, together with the structural tendencies, the central banks to turn large fiscal deficits into money in order to find a solution to the large fiscal deficits, some problems such as the debt crisis in the future problems are anticipated. The continuous increase in public and private debts puts the central banks in a serious dilemma of options, as the debt reaches a serious level and inflation rises. It is predicted that a major debt crisis and a serious recession will be triggered if it begins to gradually remove unconventional policies and increase policy rates to combat inflation. If a loose monetary policy is maintained, double-digit inflation and the next negative supply shocks may occur, with the risk of deep stagflation.

Bibliographical References

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Blanchard, O. (2022) “Why I Worry About Inflation, Interest Rates, and Unemployment.” Peterson Institute for International Economics (blog). March 14.


Blinder, A. S. (1979). Government policy and the great stagflation. Academic Press.


Bonatti L., Fracasso A., Tamborini R. (2020). Rethinking Monetary and Fiscal Policy in the Post-COVID Euro Area. Publication for the Committee on Economic and Monetary Affairs, Moinetray Dialogue Papers, European Parliament, Luxembourg, November

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Food and Agriculture Organization of the United Nations (FAO)(April 7, 2022). Response to the Ukraine Crisis: Social Protection for Food Security and Nutrition.


Glauber, J. & Laborde, D. (2022). How will Russia’s invasion of Ukraine affect global food security?. Internatioal Food Policy Research Institute (IFPRI). https://www.ifpri.org/blog/how-will-russias-invasion-ukraine-affect-global-food-security

Guenette, J. D., Kenworthy, P. G., & Wheeler, C. M. (2022). Implications of the War in Ukraine for the Global Economy.

Hay, C. (1996). NARRATING CRISIS: THE DISCURSIVE CONSTRUCTION OF THE “WINTER OF DISCONTENT.” Sociology, 30(2), 253–277. http://www.jstor.org/stable/42855681 Hellema, D., Wiebes, C., & Witte, T. (2004). The Netherlands and the Oil Crisis: Business as Usual (p. 320). Amsterdam University Press.


Hideo, T. (2022). Learning the Lessons of Inflation. https://www.nippon.com/en/japan-topics/g02095/Khemani N. K., (2022). Asian Times. https://asianatimes.com/due-to-the-ukraine-conflict-trade-patterns-have-shifted/ Merijn Oudenampsen & Bram Mellink (2021)The roots of Dutch frugality: the role of public choice theory in Dutch budgetary policy,Journal of European Public Policy,DOI: 10.1080/13501763.2021.1936130


Norton-Taylor, R. (1973). Netherlands introduces car-free Sundays - archive, 1973. The Guardian. https://www.theguardian.com/world/from-the-archive-blog/2020/nov/04/netherlands-introduces-car-free-sundays-archive-1973 Romagnoli, A. (2022). The emergence of the ‘sovereign debt crisis’ in 1970s MENA economies, Middle Eastern Studies, 58:5, 712-727, DOI: 10.1080/00263206.2022.2081555. Roubini N. (2021). The looming stagflationary debt crisis. Project Syndicate, June 30. https://www.project-syndicate.org/commentary/stagflation-debt-crisis-2020s-by-nouriel-roubini-2021-06


Shams Esfandabadi, Z., Ranjbari, M., & Scagnelli, S. (2022). The imbalance of food and biofuel markets amid Ukraine-Russia crisis: A systems thinking perspective. Biofuel Research Journal, 9(2), 1640-1647.


Summers, L. H. (2022). “The Stock Market Liked the Fed’s Plan to Raise Interest Rates. It’s Wrong.” Washington Post, March 17.

Takahashi, Y., & Takayama, N. (2022). Hidden Stagflation (Discussion Paper Series A No. 733).

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