Stagflation, the Phillips curve and disinflation
Three ideas economists use to describe prices and the economy, and the 1970s shock that tested an old rule.
What the paper can ask
- Phillips published his study in 1958, using British data from 1861 to 1957; Samuelson and Solow restated the idea for inflation in 1960.
- Friedman and Phelps argued in 1967 and 1968 that the pattern holds only in the short run, not the long run.
- The word stagflation was coined by British Conservative Iain Macleod in a 1965 speech in the House of Commons.
- The 1973 oil embargo, which followed the Yom Kippur War, was a major supply shock that made the 1970s trouble a global episode.
- Paul Volcker, head of the US Federal Reserve, raised interest rates sharply from 1979, and inflation came down in the early 1980s.
Why exams ask
Setters ask what stagflation means, what the Phillips curve links, and how disinflation differs from deflation.
The full story
In the mid 1900s economists looked for patterns in how prices, wages and jobs move together. A. W. Phillips published one famous pattern in 1958, and a curve now carries his name. In the 1970s oil shocks hit many economies, and the old rule stopped working. A British politician had already coined a word for that kind of trouble in 1965. A related word, disinflation, is often confused with deflation.
Test yourself
1.Stagflation refers to a situation of:
Correct. Stagflation = stagnation + inflation, as in the oil-shock 1970s, when prices rose while output and jobs fell.
Not quite. Stagflation = stagnation + inflation, as in the oil-shock 1970s, when prices rose while output and jobs fell. It goes into your error book.
2.The Phillips curve shows the relationship between inflation and:
Correct. The Phillips curve (1958) shows an inverse short-run relationship: lower unemployment tends to go with higher inflation.
Not quite. The Phillips curve (1958) shows an inverse short-run relationship: lower unemployment tends to go with higher inflation. It goes into your error book.
3.Disinflation means:
Correct. Disinflation is a slowdown in the pace of price rise; deflation is an actual fall in the price level.
Not quite. Disinflation is a slowdown in the pace of price rise; deflation is an actual fall in the price level. It goes into your error book.