Economists cite two main causes of stagflation.

Economists cite two main causes of stagflation.

First, stagflation can be caused by a drop in production due to a sudden change in the price of a commodity that is important to the economy (a so-called price shock). For example, it can be a sharp increase in the price of oil for the importing country or a decrease - for the exporting country.

Second, a simultaneous slowdown in output growth (stagnation) and a rise in prices (inflation) can be the result of an incorrect economic policy of the government. For example, a country's central bank can cause inflation by issuing too much money into circulation, while over-regulation of the labor market and production by the government can lead to a slowdown in business activity (stagnation).

The global stagflation of the 1970s was caused by the above-mentioned reasons. The process was triggered by a sharp rise in oil prices as a result of the OPEC embargo on oil supplies to a number of countries. The situation was exacerbated by the wrong reaction of national central banks, which tried to stimulate growth by pumping money into the economy (see Keynesianism), which only led to uncontrolled growth of prices and wages.