Econ 101: What is slumpflation?

When a country fights both the problem of economic contraction and high inflation, it can be said that there is slumpflation in that country. In general, it is a term used to describe the crises that occur from time to time in the economies of the countries. What is slumpflation, how does it affect the economy?

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Slumpflation is called economic contraction within inflation. It is a difficult problem to deal with. If inflation and shrinkage are not stopped in a country with slumpflation, the economy of the country will suffer more. So how does slumpflation affect the economy then?

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What is slumpflation?

Problems and crises may occur in a country’s economy from time to time. The economic policies of the countries are also arranged for these problems. In some economies, many problems arise at the same time. Slumpflation is also used to describe one of such economies.

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If there is both economic contraction and inflation in a country, it is possible to talk about slumpflation in that country’s economy. Under normal circumstances, inflation brings with it economic growth. For this reason, countries try to catch the moderate inflation level. However, slumpflation is a crisis in which economic contraction occurs along with inflation. It is necessary to both stop inflation and ensure economic growth.

How does slumpflation affect the economy?

The country’s macroeconomic goals and policy instruments conflict while dealing with the slumpflation crisis. Because while the policy of cooling the economy is pursued in the fight against inflation, the policies of expanding the economy are followed in the fight against shrinkage.

Slumpflation is more common in underdeveloped or developing countries. As production declines or even comes to a standstill, the price of goods and services in the market increases. As a result, the purchasing power of the people decreases.

Many businesses close in economies with slumpflation. Factories begin to produce less. Employment falls and unemployment rises. In such economies, a very high rate of price increase is observed in basic consumer products. It is one of the most difficult economic crises to manage.

What is the difference between slumpflation and stagflation?

Slumpflation and stagflation are concepts that are often confused with each other. The subtle difference between them can sometimes be overlooked. Both concepts encompass an economy with inflation. However, while slumpflation refers to economic contraction within inflation, stagflation is used to express economic stagnation within inflation.

Stagflation is a situation where inflation is experienced when real growth in the economy is close to zero or there is no growth. Slumpflation, on the other hand, occurs with inflation experienced in a period of continuous shrinkage in the economy.