Stagflation

we've learned that a moderate level of inflation is normally associated with the good economy but what we saw and we in particular we saw in the early 70s in 1973 when the oil embargo hit is that we started to experience something called stagflation or there's something that was kind of labeled stagflation it's this weird bizarre circumstance where you have inflation at the same time as stagnation in the economy so that's where they get this kind of combination of words of stagflation let's think about how that would happen in particular let's think about how that would happen due to a supply shock there's other ways that you could get stagflation if if you have strange regulations over-regulation if the government does weird things but the classic example is a supply shock and we say supply shock it's something like an oil embargo where all of a sudden the supply of oil the supply of something just goes down goes down dramatically and it could become because of some type of emergency or it could be literally because of an embargo and just think about what the what how that would affect the rest of this chain so the supply of something dramatically goes down we know that supply has an inverse relationship with price so supply goes down then BAM right there you see price price would immediately go up and we think about something like oil you might say anyway that just you know oil is only the part of my pocketbook where I drive around but it's not because even when you buy a fruit you're really paying for the transportation cost so the price of oil affects fruit affects food affects any good in services it's one of these things that's pervasive through the economy so the prices of a bunch of things could generally go up well if the price of a bunch of things generally go up what's going to happen to demand once again inverse relationship right over here demand demand is going to plummet demands going to plummet if demand plummets utilization plummets utilization plummets investment plummets and profit is going to plummet and profits going to plummet now because one utilization is going down and price has gone up but it's not the price that they can sell things at now price is fundamentally a big cost for especially if you think of if you think of a from a us-centric point of view if oil is an import in the case of the early 70s then prices also prices also price going up is going to have in or I guess they have an inverse relationship so the price goes up is really going to be on the cost side so once again hitting profits hard and if all of these things go down that's just going to kill employment kill wages and then further make demand even worse so stagflation is that situation where you have some type of shock to the system where in in the kind of a classic scenario it hits supply so hard it causes a massive inflation in one part of the economy and in the case of oil part that affects other parts of the economy and then all of that kind of throws a monkey wrench in everything else