{"id":1077,"date":"2026-04-07T06:55:31","date_gmt":"2026-04-07T06:55:31","guid":{"rendered":"https:\/\/materials.simplycurrentaffairs.com\/?p=1077"},"modified":"2026-04-09T06:56:42","modified_gmt":"2026-04-09T06:56:42","slug":"iran-war-and-the-looming-prospect-of-stagflation","status":"publish","type":"post","link":"https:\/\/materials.simplycurrentaffairs.com\/index.php\/2026\/04\/07\/iran-war-and-the-looming-prospect-of-stagflation\/","title":{"rendered":"Iran war and the looming prospect of stagflation"},"content":{"rendered":"\n

Iran war and the looming prospect of stagflation<\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/mark><\/strong><\/h2>\n\n\n\n

Background:<\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/mark><\/strong><\/h3>\n\n\n\n
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  • During the 1970s and early 1980s, most Western countries experienced \u201cstagflation\u201d\u2014 a condition where low, if not\u00a0negative,\u00a0economic growth<\/strong>\u00a0coexisted with high inflatio<\/strong>n.\u00a0<\/li>\n\n\n\n
  • During these\u00a0episodes of\u00a0stagflation\u00a0the driver\u00a0was\u00a0oil shocks.\u00a0<\/li>\n\n\n\n
  • The first one came after the Yom Kippur War between Israel and Egypt-Syria. The Organization of Arab Petroleum Exporting Countries implemented a\u00a0total oil embargo\u00a0<\/strong>against the Western nations that had supported Israel. The second oil crisis happened with Iran\u2019s Islamic Revolution in 1979, followed by Iraq\u2019s invasion of Iran a year later.\u00a0<\/li>\n\n\n\n
  • Since that time, the world has\u00a0witnessed\u00a0at least\u00a0three oil shocks\u00a0<\/strong>\u2014 in 2008, 2022 and 2026. The 2008 shock resulted in stagnation (negative to\u00a0very low\u00a0single-digit GDP growth), but no runaway inflation. The 2022 Russia-Ukraine war produced some inflation, but no great recession.\u00a0<\/li>\n<\/ul>\n\n\n\n

    Will 2026 see the return of stagflation?<\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/mark><\/strong><\/h3>\n\n\n\n
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    • In standard textbook economics, there is a supply and a demand curve. The\u00a0supply curve slopes upward<\/strong>\u00a0from left to right, depicting a positive relationship: as prices rise, producers are encouraged to increase the quantity supplied of a particular good.\u00a0\u00a0<\/li>\n\n\n\n
    • The demand curve, conversely, is\u00a0downward sloping:<\/strong>\u00a0Consumers buy more of a good at lower prices and less at higher rates.<\/li>\n<\/ul>\n\n\n\n
      \"\"<\/figure>\n\n\n\n

      Fig: The point where demand and supply curves intersect is the market-clearing equilibrium.<\/p>\n\n\n\n

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      • The accompanying chart shows\u00a0an initial\u00a0supply curve (S0) and the demand curve (D0). The point where they intersect is the\u00a0market-clearing equilibrium.<\/strong>\u00a0At the equilibrium price P0, the quantity demanded by consumers Q0 matches what the producers offer to supply.\u00a0<\/li>\n\n\n\n
      • Stagflation typically arises from\u00a0\u201cnegative supply shocks\u201d.<\/strong>\u00a0Normally, any increase or decrease in the supply of a good is due to changes in its price, with other factors such as input costs, production conditions and technology\u00a0remaining\u00a0the same. The movement here is from one point to another on the same supply curve.\u00a0<\/li>\n\n\n\n
      • In a supply shock, the\u00a0entire supply curve shifts<\/strong>\u00a0rightward or leftward. Producers would now offer to supply more or less of a good at the same price.\u00a0\u00a0<\/li>\n\n\n\n
      • A positive supply shock is usually thanks to any new productivity-boosting technology (say, AI) or lower input costs, whether of energy or raw materials. The triggers for negative supply shocks are the opposite \u2014 from pandemics and natural disasters to wars and closure of vital shipping lanes (think the Strait of Hormuz). The resultant\u00a0disruptions to production<\/strong>\u00a0and trade\u00a0shifts\u00a0the supply curve to the left.<\/li>\n\n\n\n
      • One can see the effect of the supply curve shifting from S0 to S1 in the chart. At the new intersection point of the supply\u00a0curve\u00a0S1 and D0, not only is the equilibrium price higher at P1,\u00a0the quantity\u00a0supplied, too, is lower at Q1. That, in short, is stagflation.<\/li>\n<\/ul>\n\n\n\n

        Can that be a real possibility today?<\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/mark><\/strong><\/h3>\n\n\n\n
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        • It depends on the\u00a0magnitude\u00a0and duration of the supply shock.<\/strong>\u00a0<\/li>\n\n\n\n
        • The present crisis is both a\u00a0price and a supply shock,\u00a0<\/strong>making it more pernicious than 2022 or 2008. It\u00a0isn\u2019t\u00a0just prices, but the availability of energy\u00a0itself that\u00a0has become a question mark.\u00a0\u00a0<\/li>\n\n\n\n
        • When gas or LPG is not available, you risk a sudden stoppage in industrial activity. These\u00a0sudden stops generate non-linear outcomes\u00a0<\/strong>in the economy.\u00a0\u00a0<\/li>\n\n\n\n
        • In the 1970s, Indian farmers were only beginning to use chemical\u00a0fertilisers, while households\u00a0overwhelmingly relied on firewood\u00a0<\/strong>and dung cakes for cooking and a miniscule minority wore polyester and nylon fabrics.\u00a0<\/li>\n\n\n\n
        • That\u2019s\u00a0not the case today, where urea and di-ammonium phosphate have practically replaced farmyard manure, LPG cylinder coverage is near-universal, and\u00a0man-made\u00a0fibres\u00a0are\u00a0ubiquitous.<\/strong>\u00a0\u00a0<\/li>\n\n\n\n
        • Not for nothing the Indian economy is\u00a0much more vulnerable<\/strong>\u00a0to what is now a full-fledged energy crisis,\u00a0impacting\u00a0not only prices but actual availability of oil, gas and the petrochemical feedstocks and intermediates derived from them that go into a host of downstream industries.<\/li>\n<\/ul>\n\n\n\n

          How does one deal with stagflation?<\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/mark><\/strong><\/h3>\n\n\n\n
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          • If the Iran war were to end soon \u2014 and\u00a0assuming that\u00a0the attacks on the West Asian oil refineries and natural gas processing facilities\u00a0haven\u2019t\u00a0caused\u00a0significant damage<\/strong>\u00a0from a production restoration standpoint \u2014 the supply curve may revert from S1 to S0 quickly.\u00a0<\/li>\n\n\n\n
          • Recessions or low single-digit growth rates (like what India has faced in the past) can be addressed through\u00a0expansionary fiscal<\/strong>\u00a0and\u00a0monetary policies<\/strong>.\u00a0\u00a0<\/li>\n\n\n\n
          • Inflation alone can similarly be dealt with by\u00a0tightening money supply and raising interest\u00a0<\/strong>rates.\u00a0<\/li>\n\n\n\n
          • Neither of these tools works easily\u00a0<\/strong>in stagflations. Jacking up interest rates to fix one\u00a0component\u00a0(inflation) may worsen the other (stagnant growth and high unemployment). Fiscal and monetary loosening to stimulate demand, when supply is constrained, will simply further fuel inflation.\u00a0<\/li>\n\n\n\n
          • Given that traditional fiscal and monetary tools are\u00a0designed to manage demand,<\/strong>\u00a0they are seen to be ineffective against stagflation, which is primarily a supply-side phenomenon.\u00a0\u00a0<\/li>\n\n\n\n
          • The\u00a0solutions, then,\u00a0would lie in repairing and\u00a0restoring broken supply chains.<\/strong>\u00a0But\u00a0that\u2019s\u00a0easier said than done.<\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"

            Iran war and the looming prospect of stagflation Background: Will 2026 see the return of stagflation? Fig: The point where demand and supply curves intersect is the market-clearing equilibrium. Can that be a real possibility today? How does one deal with stagflation?<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[48],"tags":[],"class_list":["post-1077","post","type-post","status-publish","format-standard","hentry","category-editorial"],"_links":{"self":[{"href":"https:\/\/materials.simplycurrentaffairs.com\/index.php\/wp-json\/wp\/v2\/posts\/1077","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/materials.simplycurrentaffairs.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/materials.simplycurrentaffairs.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/materials.simplycurrentaffairs.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/materials.simplycurrentaffairs.com\/index.php\/wp-json\/wp\/v2\/comments?post=1077"}],"version-history":[{"count":1,"href":"https:\/\/materials.simplycurrentaffairs.com\/index.php\/wp-json\/wp\/v2\/posts\/1077\/revisions"}],"predecessor-version":[{"id":1079,"href":"https:\/\/materials.simplycurrentaffairs.com\/index.php\/wp-json\/wp\/v2\/posts\/1077\/revisions\/1079"}],"wp:attachment":[{"href":"https:\/\/materials.simplycurrentaffairs.com\/index.php\/wp-json\/wp\/v2\/media?parent=1077"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/materials.simplycurrentaffairs.com\/index.php\/wp-json\/wp\/v2\/categories?post=1077"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/materials.simplycurrentaffairs.com\/index.php\/wp-json\/wp\/v2\/tags?post=1077"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}