I'm not an economist, but Stagflation
Surely, many have heard about such words from macroeconomics as inflation, hyperinflation, devolution, default. Now we are destined to remember what stagflation is and why it is now important to know about it. For many, this is a complex and obscure term, but it describes a rather important phenomenon that can significantly affect the lives of each of us. In this article we will look at what stagflation is, why this phenomenon is especially dangerous and what consequences it may have for the Russian economy in the coming years.
Definition: Stagflation (collaboration stagnation + inflation) is a situation in which an economic recession and a depressed state of the economy (stagnation and rising unemployment) are combined with rising prices – inflation.
This is one of the most difficult situations in the economy, which occurs infrequently. It is very difficult to overcome it.
In simple words: Stagflation is an unusual situation in economics when three things happen simultaneously:
Economic recession or stagnation — economic growth slows down or stops altogether.
Rising inflation — prices for goods and services are rising, the purchasing power of the population is falling.
Rising unemployment — companies begin to cut production, lay off employees, and it becomes more difficult for people to find work.
EXAMPLE:
Imagine that your parents buy bread, milk, clothes and other necessary things every month. Everything was fine, but suddenly three unpleasant things happened in a short period.
Stores are starting to raise prices. Now the same bread and milk are much more expensive. Your family can buy less food because prices have risen, but the money remains the same. It's called inflation – when everything becomes more expensive. Problems began at the factory where my father works. The factory sells fewer goods because buyers also began to save money. The plant cuts production, and dad is asked to go on vacation without pay or is fired. This – stagnation or an economic downturn when companies start making less money and don't have enough work for everyone. Finding a new job is difficult. The father begins to look for another job, but all enterprises have the same problems: many companies are laying off staff, and it is very difficult to find a new job. It's called unemployment. Now the family has three problems at the same time: prices for everything are rising, there is less money because there is no work, and it is difficult to find a new job. This situation is called stagflation.
Typically in economics, high inflation is associated with strong demand, when people actively buy goods and businesses increase production. But with stagflation, everything is different: prices rise, but the economy does not develop, people lose their jobs, and companies suffer from rising costs.
The term “stagflation” was first coined in the 1960s by British politician Ian MacLeod, but the concept became widespread in the 1970s as Western countries faced soaring oil prices and economic difficulties. This was the first major example of stagflation, where prices and unemployment rose simultaneously while the economy stagnated. Before this, it was thought that this was impossible.
In the 1970s, the United States faced severe stagflation, when the economy simultaneously experienced high inflation, low economic growth, and rising unemployment. This was an unexpected development, since it was previously believed that inflation and unemployment could not rise at the same time. There were several reasons why this happened:
Oil prices:
In 1973, OPEC countries imposed an embargo on oil exports to the United States and other countries supporting Israel. This led to a sharp increase in oil and fuel prices, which caused a jump in the prices of many goods and services. Energy costs have risen sharply, increasing production costs for many companies.Mistakes in economic policy:
The government and the Federal Reserve tried to combat the economic downturn by stimulating the economy through increasing the money supply. But this led to increased inflation: there was more money in the economy, but production decreased.Slowdown in industrial growth:
Due to rising oil prices, manufacturing companies began to reduce production volumes. This increased unemployment and slowed economic growth.
How many have heard about depressed Detroit? As a result of these processes, Detroit, which was once a thriving industrial center of the United States, began to rapidly decline in the 1970s. The city experienced mass unemployment, population outflow and economic collapse, the consequences of which are still felt today. Also, he gave us Eminem and 8 Mile.
Why might this happen?
Economists have identified several main causes of stagflation, and in the context of Russia in 2025 they may be especially relevant:
Sharp changes in prices for raw materials. Historically, the Russian economy has been heavily dependent on oil and gas exports. If the prices for these resources rise sharply (or, conversely, fall), this will create serious problems. Rising oil prices can cause prices for other goods to rise because energy is a key part of production costs. On the other hand, if oil prices fall, budget revenues will decline, which will hit the entire economy.
Mistakes in economic policy. When the government regulates the labor market or industrial production too much, it can slow down business development. At the same time, if the government begins to print too much money and increases the money supply to cope with the budget deficit, this can lead to increased inflation. As a result, the economy may slow down and prices will begin to rise. And usually an increase in inflation is an indicator of economic growth.
Global economic turmoil. Economic sanctions and political restrictions imposed by other countries worsen trade relations and impede access to technology and resources. This leads to a reduction in production capabilities and, as a result, to an increase in prices for goods.
In Russia, stagflation was observed in the 1990s, after the collapse of the Soviet Union. During this period, price liberalization led to a rapid rise in inflation and a simultaneous decline in GDP. In 1998 there was a default. To overcome the consequences of stagflation and default, the following measures were taken:
tax reform was carried out;
The banking sector was cleaned up;
Dependence on external debt has been reduced.
export development
cheap production attracted investment to a large untapped market
These measures helped stabilize the economy and created conditions for its growth in the 2000s.
How can stagflation manifest itself in Russia now?
Price increases (inflation):
An accelerated rise in prices for goods and services is one of the first signs of stagflation. As inflation rises, prices for food, fuel, utilities and other essential goods begin to increase rapidly. Remember the sharp jumps in eggs last year and oils this year.
Ruble depreciation: If the ruble continues to weaken, especially in the context of foreign economic isolation and sanctions, this will further accelerate inflation as imported goods become more expensive. Well, everyone here is aware of currency prices.
Shortages of goods: Import restrictions and supply difficulties due to foreign economic factors can lead to shortages of certain goods, which will increase inflation and increase prices in the domestic market.
About the situation with oil, as an example, the impact on the economy is complex:
Economic growth slowdown (stagnation):
Falling domestic demand: Due to rising prices, people will begin to spend less money on goods and services, except for the most necessary. This will lead to a decrease in consumer activity and a slowdown in economic growth.
Problems in production: Restrictions on the import of technologies, materials and components can slow down production, which will affect the decline in production volumes. This will affect both industry and small businesses, especially those who depend on imports.
Slower Investment: With economic uncertainty and rising costs, businesses may delay or cancel modernization and expansion plans, further slowing growth.
Rising unemployment
Job cuts: Due to falling demand and rising costs, many companies will begin to lay off staff, which will cause an increase in unemployment. This will especially affect small and medium-sized businesses, which are most sensitive to economic shocks. I assume this will also affect IT.
Business Closings: Companies that cannot cope with rising costs and falling demand may go bankrupt, which will also increase the unemployment rate. Even if the company relocates, it will transport with it the main economic agents who will also be extracted from the economy.
Declining real income: Even those who keep their jobs may see their wages eroded by inflation, meaning real purchasing power will decline.
Let's try to build an economic crisis spiral:
If the Central Bank raises interest rates to curb inflation, this could lead to a decrease in investment, especially in long-term projects, and an increase in the cost of lending. Which leads to the growth of companies that stop expanding their production and do not hire new ones. The return of a large number of military personnel will increase the number of economically active citizens looking for work.
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The combination of unemployment and inflation will push more people into poverty. The decline in purchasing power will hit most households, especially those who were already struggling financially. In conditions of stagflation, the state budget may face a deficit due to decreased tax revenues and the need to increase social benefits. This will require additional borrowing or spending cuts on important government programs. The government may need to borrow money to support the economy, which will lead to an increase in government debt. At the same time, due to sanctions, access to international capital markets is limited, which will complicate financing.
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However, if the economy is stagnating and companies are not growing or creating new jobs, there will be an imbalance between the supply and demand for labor. This will lead to an even stronger increase in unemployment. People already working may face increased competition from those returning. This could lead to lower wages as labor supply exceeds demand.
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Employers may use this situation to withhold or even reduce wages, which can worsen the financial situation of many families. People, despite rising prices and decreasing purchasing power of wages, will be forced to accept low-paid jobs, since there may be few alternative offers.
And so on, influencing each other, and the Central Bank and the Ministry of Finance do not have the leverage to influence such a situation.
“Nadorshin, assessing the statements of the Central Bank, believes that the regulator will fight the credit bubble until victory and is ready to sacrifice economic growth, which will be stopped by high rates… The regulator, judging by its own forecasts, is ready and can take this step. The question is when and how severe the recession will be. The first and second quarters of next year look like the best candidates for the start of a recession. And the recession may be protracted, not like what we were used to in past years. I admit that it may last after the end of 2025,” says Evgeniy Nadorshin.
In general, stagflation is like being in an expensive restaurant, where the food is running out, and the prices for it have skyrocketed, and you only have change in your pocket. There are more and more people, fewer and fewer waiters, and the bill for “air” continues to grow. But the main thing here is not to panic. You may not be able to order a steak, but with cunning and ingenuity you can find a way out: make friends with the cook, sit down at the next table, or come up with your own survival recipe. After all, in such a situation it is better to preserve yourself and not lose hope – perhaps there is still dessert ahead of you!
