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I just want to clear up some misconceptions I keep hearing about rising prices in concert with a stagnant economy. Typically people think of stagflation as a stagnant economy with inflationary pressures that are causing prices to rise across the board. In reality, what we are experiencing now is distinctly different in that prices are rising independently of inflation, which essentially is the true definition of stagflation.

In reality, economies experience inflation as a product of uncontrolled growth and investment. This is because when an individual or corporation stores money in a bank the bank can then loan out typically 90 to 95 percent of that money to other people . This causes the supply of money to rise and the currency becomes devalued, which causes all prices to rise. Essentially, inflation means rising prices but rising prices doesn’t necessarily mean inflation. Inflation is also typically harder on the people with lower incomes who are engaging in a much lower degree of investment.

Obviously, what is happening now is not uncontrolled investment hurting the value of our currency. Rather, the high price of energy, and to some degree the lame housing market, is simultaneously slowing the economy and causing prices to rise. To me it seems that this is a new kind of economic situation, that in our society could only be the product of an energy shortage. We saw this for the first time with the oil embargo in the seventies and we’re seeing it again with the current increase in the price of oil.

While stagflation probably isn’t as devastating, for the lower half of income earners, as run-away inflation might be. Stagflation shows how closely our quality of life is tied directly or indirectly to the availability of energy resources.