Editing Stagflation (section)

==Causes==
{{see also|Yom Kippur War|Six-Day War|Closure of the Suez Canal (1967–1975)}}
[[File:Crude-oil-price-history-chart-2022.webp|thumb|[[1973 oil crisis]] caused an increase in the price of [[Brent Crude]]]]
[[File:Uk m4 and inflation.webp|thumb|300px|
{{legend-line|#4572A7 solid 4px|UK M4 Money Supply Increases}}
{{legend-line|#AA4643 solid 4px|UK Inflation}}
]]
Economists offer two principal explanations for why stagflation occurs. First, stagflation can result when the economy faces a [[supply shock]], such as a rapid increase in the [[price of oil]]. An unfavourable situation like that tends to raise prices at the same time as it slows [[economic growth]] by making production more costly and less profitable.<ref name="delong">{{cite web |url=http://econ161.berkeley.edu/multimedia/ASAD1.html |title=Supply Shocks: The Dilemma of Stagflation |access-date=2008-01-24 |author=J. Bradford DeLong |date=3 October 1998 |publisher=University of California at Berkeley |url-status=dead |archive-url=https://web.archive.org/web/20080509080947/http://econ161.berkeley.edu/multimedia/ASAD1.html |archive-date=9 May 2008 }}</ref><ref name="burdawyplosz">{{Cite journal|last1=Burda|first1=Michael|last2=Wyplosz|first2=Charles|year=1997|title=Macroeconomics: A European Text, 2nd ed|publisher=Oxford University Press|location=Oxford, England|pages=338–339}}</ref><ref name="halltaylor">
{{cite book |first1=Robert |last1=Hall|first2=John|last2=Taylor|title=Macroeconomics: Theory, Performance, and Policy |publisher=[[W.W. Norton]] |location=New York City|date=1986 |isbn=0-393-95398-X}}</ref><ref>{{cite book|first1=William J.|last1=Baumol|first2=Alan S.|last2=Blinder|title=Macroeconomics: Principles and Policy|chapter-url=https://books.google.com/books?id=qQW0BAAAQBAJ&pg=PA206|date=2015|publisher=[[Cengage Learning]]|location=Boston, Massachusetts|isbn=978-1-305-53405-6|page=206|chapter=Ch. 10 Bringing in the Supply Side: Unemployment ''and'' Inflation?}}</ref>

Second, the government can cause stagflation if it creates policies that harm industry while growing the money supply too quickly. These two things would probably have to occur together because policies that slow economic growth rarely cause inflation, and policies that cause inflation rarely slow economic growth.{{citation needed|date=November 2024}}

===Supply shock===
{{see also|Nixon Shock}}
As soon as the [[Six-Day War]] started in 1967 and [[Israel]] invaded the [[Sinai Peninsula]] down to the [[Suez Canal]], the [[Egyptians|Egyptian]] President [[Gamal Abdel Nasser]], who was aligning with the [[Soviet Union]], [[Closure of the Suez Canal (1967–1975)|closed down the Suez Canal for eight years]]. Oil from the Middle East to Europe had to be rerouted around [[Africa]].  Egypt then tried to cross the Suez Canal and take back the Sinai Peninsula in the [[Yom Kippur War]] in late 1973.  [[Richard Nixon]] supported funding Israel with $2.2 billion over the conflict, which triggered an [[1973 oil crisis|oil embargo]] in October 1973 when the countries of the Organization of Arab Petroleum Exporting Countries ([[OAPEC]]) cut production of oil and placed an [[embargo]] on oil exports to the United States and other countries backing Israel.<ref>{{cite web|last=Corbett |first=Michael |url=https://www.federalreservehistory.org/essays/oil-shock-of-1973-74 |title=Oil Shock of 1973–74 |publisher=Federal Reserve History |date= |accessdate=2022-08-27}}</ref><ref>{{cite web |url=https://www.history.com/topics/africa/suez-canal |title=Suez Canal |publisher=History.com |date=2021-03-30 |accessdate=2022-08-27}}</ref>

===Excess demand===
[[File:M2, CPI, PCE.webp|thumb|325px|right|(Percent change from a year earlier)
{{legend-line|#4572a7 solid 4px|[[Money supply|M2 money supply]]}}
{{legend-line|#89A54E solid 4px|CPI}}
{{legend-line|#80699B solid 4px|[[Core inflation|Core]] CPI}}
]]
Money supply in the early 1970s increased at almost 15% year over year in the United States and the [[Consumer price index]] lags behind about one year or two. Britain's monetary policy was also [[Dovish (inflation)|dovish]] causing excess demand.
<ref>{{cite web | url=https://www.investopedia.com/ask/answers/040615/what-actions-or-policies-can-government-agency-take-counteract-and-end-stagflation-economy.asp#:~:text=Stagflation%20is%20an%20economic%20condition,are%20considered%20ineffective%20against%20stagflation | title=How to Control Stagflation }}</ref><ref>{{Cite web| title=UK inflation in the 1970s and 1980s: the role of output gap mismeasurement | url=https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2001/uk-inflation-in-the-1970s-and-1980s-the-role-of-output-gap-mismeasurement.pdf | archive-url=https://web.archive.org/web/20210518194139/https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2001/uk-inflation-in-the-1970s-and-1980s-the-role-of-output-gap-mismeasurement.pdf | archive-date=2021-05-18}}</ref>

===End of Bretton Woods system===
[[File:Price of gold.webp|thumb|Price of gold 1915-2022]]
In the mid 1970s the [[Bretton Woods system]] was failing and countries' [[fixed exchange rate system]] between currencies started to [[Floating exchange rate|float]], and the [[gold standard]] where currencies were [[Fixed exchange rate system|pegged]] to gold was abandoned.  The price of [[Gold as an investment|gold]] and [[Petroleum industry|oil]] became very [[Volatility (finance)|volatile]] after many years of steadiness.<ref>{{cite web | url=https://www.imf.org/external/about/histend.htm#:~:text=End%20of%20Bretton%20Woods%20system,-The%20system%20dissolved&text=In%20August%201971%2C%20U.S.%20President,the%20breakdown%20of%20the%20system | title=About the IMF: History: The end of the Bretton Woods System (1972–81) }}</ref><ref>{{cite web | url=https://cepr.org/voxeu/columns/operation-and-demise-bretton-woods-system-1958-1971 | title=The operation and demise of the Bretton Woods system: 1958 to 1971 | date=23 April 2017 }}</ref>
[[File:US Dollar Index DXY.webp|thumb|400px|center|
{{legend|#00A2FF|outline=#0076BA|[[U.S. Dollar Index|US Dollar Index]] (DXY) <br> In the early 1970s, this graph shows some currencies at [[fixed exchange rates]] before [[Floating exchange rate|floating]] against each other:}}
{{legend-line|#F27200 solid 3px|[[United States dollar|USD]]/[[GBP]] [[exchange rate]]}}
{{legend-line|#017100 solid 3px|USD/[[Canadian dollar]] exchange rate}}
{{legend-line|#004D80 solid 3px|[[Euro|EUR]]/USD ([[multiplicative inverse|inverted]]) exchange rate}}
{{legend-line|#BC002D solid 3px|USD/[[Japanese yen|JPY]] exchange rate}}
{{legend-line|#FFCD00 solid 3px|USD/[[Swedish krona|SEK]] exchange rate}}
{{legend-line|black solid 3px|USD/[[Swiss franc|CHF]] exchange rate}}
]]

===Other reasons===
There is evidence supporting the second explanation against the supply shock view that the 1970s stagflation was due to OPEC's quadrupling of oil prices in October 1973. Data show that its seeds were sown during the late sixties and began to be reaped in that decade. Between 1968 and 1970 unemployment rose from 3.6% to 4.9% while the CPI inflation rose from 4.7% to 5.6%.<ref>{{Cite news |last=Moorthy |first=Vivek |date=16 Sep 2008 |title=Debunking supply shock myth |work=livemint |url=https://www.livemint.com/Opinion/DC1EKQrva9XQ5PYPHUWHuK/Debunking-supply-shock-myth.html}}</ref>{{Better source needed|date=November 2024}} Further in the Michigan survey expected inflation rose from 3.8% to 4.9% between 1967 and 1970. The rise in expected inflation strongly supports the view that Expected Augmented Phillips Curve (EAPC) can explain the early, mild stagflation. Although the weakening economy was putting some downward pressure on inflation overall inflation rose in accordance with EAPC, as expected inflation kept rising. The stagflation became more severe in the early 1970s but was suppressed by the price controls and wage freeze imposed by President Nixon starting in August 1971 and through 1972. But when the controls were lifted in mid-1973 the CPI surged to 8.5%. Arguably, if there were no wage-price controls, the mini stagflation documented above would have been clearly evident before the October 1973 OPEC oil price hike.<ref name=":0">{{Cite book |last=Moorthy |first=Vivek |title=Applied Macroeconomics: Employment, Growth and Inflation |publisher=I.K. International |year=2017 |isbn=978-93-85909-04-7 |location=Delhi |pages=112 and 114 |language=English}}</ref>

As for the direct impact of dollar depreciation on inflation, data again imply that just as higher inflation shifted up the labor supply curve and made workers demand and get higher money wages, similarly a falling dollar made commodity producers demand higher prices to compensate for the dollar decline. Further, the weakening of the dollar, while exogeneous to oil prices, was itself a delayed response to rising inflation from 1968 onwards. This pattern of an overheated economy, leading to inflation, dollar depreciation, and then to higher oil prices and another bout of stagflation repeated itself in 1979.<ref name=":0" />

Both explanations are offered in analyses of the [[1973–1975 recession|1970s stagflation in the West]]. It began with a large rise in oil prices, but then continued as central banks used excessively stimulative monetary policy to counteract the resulting recession, thereby causing a [[price/wage spiral]].<ref>{{Cite journal|last1=Barsky|first1=Robert|last2=Kilian|first2=Lutz|year=2000|title=A Monetary Explanation of the Great Stagflation of the 1970s|journal=CEPR Press Discussion Papers | number = 2389|url=http://fordschool.umich.edu/rsie/workingpapers/Papers451-475/r452.pdf}}</ref>

Increased requirements on skill (education and experience) on work force, for example because of increased technical complexity, can cause shortage on skilled employees and rising salaries for them, at the same time as uneducated work tasks have in part moved to low salary countries such as in Asia, causing high unemployment.{{cn|date=November 2024}}