Rian le Roux, chief economist at OMIGSA, says that this is a macro-economic term used to describe a period of relatively high inflation combined with economic stagnation (slow economic growth, often accompanied by rising unemployment). There is no official quantification for which exact combination(s) of high inflation and low economic growth officially qualifies as stagflation, so more acute and milder versions are possible.
Stagflation typically develops because central banks fail to take tough, immediate action during the early stages of rising inflation. Often the initial rise in inflation is brought about by an external shock (like a sharp rise in commodity prices or a currency collapse). It is then ‘allowed’ to spread structurally through the economy via higher inflation expectations and wage demands.
The reasons for central bank inaction can be varied and include: a belief that the reasons for rising inflation are beyond their control; tough action may be viewed as too painful for the macro-economy; or political pressure may prevent the central bank from acting decisively. Other factors that contribute to inflation becoming entrenched are protectionist policies, fiscal indiscipline and a serious loss of investor confidence, which, in turn, causes an extended period of acute currency depreciation.