How Stagflation Happened in the 1970's

          Stagflation: high inflation with a simultaneously stagnant economy. Before the seventies, this phenomenon would be considered absurd to analysts and economists. Usually, as an economy grows, there can be inflation, but this economic growth and greater demand for products is paired with higher employment rates as businesses thereby hire more people. If there are higher rates of unemployment, this usually indicates an economy that is not growing, so monetary value stays constant.
          In January of 1979, the price per barrel of crude oil was $52.48, but by April of 1980, those prices shot up to an unprecedented %117.17. This dramatic increase is indicative of the ridiculous rise in inflation at the time. Interestingly the economy was in a recession in 1970 and would again be in 1974 and 1975. This recession paired with inflation contrasted all models that would have shown instead an inverse relationship between the two. For these reasons, the 1970's economy can be best explained by rising oil prices, unemployment, inflation, and recession. The sharp increase in oil prices created higher prices of all goods and services throughout the market, causing inflation where the same amount of money will now get you less. Thus, today's economic principles now recognize that excess liquidity in a money supply can cause these rising prices. At the time though, the central bank lowered rates in order to try and stimulate the economy, know as an easing monetary policy. Today it is considered by some that a constrictive monetary policy would have helped end stagflation earlier by easing the devastating inflation by putting the economy into recession.