Unemployment and inflation are two economic concepts widely used to measure the wealth of a particular economy, unemployment is a term used to refer to the number of people looking for work but unable to find a job, affecting communities, regions and the overall economy of a country.
As for inflation, it is the first and biggest enemy of all countries that expresses the continuous upward movement in the level of the total price of goods and services in the economy while maintaining the stability of other factors, and central banks seek to control it by raising interest rates and thus losing the purchasing power of the currency used in the economy and as a result of inflation, it takes more currency units to buy the same amount of goods and services, so economic inflation occurs here.
As for stagflation, it is a state of weak economic growth and high unemployment, i.e. economic stagnation accompanied by inflation, and this situation occurs when there is no growth in the economy, but there is a rise in prices, and with high unemployment, inflation decreases and here stagnation occurs, and in periods of recession, effective demand decreases and the level of employment of the productive apparatus decreases, so unemployment rates increase, and the coincidence of these two phenomena at the same time is a rare case in the economy, and it is called recessionary inflation and expresses the inability of the economy to fully operate its resources. To accommodate unemployment, despite rising prices, it first appeared in Europe in the seventies after the application of Keynesian theory.
The relationship between unemployment and inflation
When unemployment rates rise, it is possible that the inflation rate will decrease, that is, if the unemployment rate in a country is high, the labor force will be low, so it will be difficult for them to demand adjustment of their wages, and the rate of wage inflation is likely to decrease during a period of high unemployment, which in turn will reduce the cost of production and reduce the prices of goods and services and thus a decrease in demand withdrawal inflation and cost payment inflation.
And that the high unemployment rate is a reflection of the decline in economic output, so companies will see an increase in the volume of unsold goods and spare capacity, and in the event of an economic recession, companies will face great competition in prices, so the decline in production will certainly reduce the inflation of demand withdrawal in the economy.
Interest rates and their relationship to inflation rates
Inflation is one of the most important factors on which interest rates are determined, so any economic or financial data issued regarding inflation rates or interest rate in a country will have a significant impact on market movements and the process of buying and selling, and therefore traders are interested in such news, as the interest rate of one country relative to another country is one of the most important criteria that determine the exchange rate, and high interest rates raise the value of the currency, while its decline weakens the currency Keeping interest rates unchanged could raise or weaken the value of the currency depending on the economic insights of the time.
High inflation rates, in turn, lead to an increase in the cost rates of interest rates in the long run, and therefore interest rates will rise, which leads to a lack of demand for borrowing and thus a decrease in the purchase rates of products, which will lead to a decline in the volume of production, high unemployment rates and thus depression.
Central banks in all countries of the world are racing to raise the interest rate, in an attempt to reduce inflation, which threatens to enter strong and weak economies, as stagflation does not mercy anyone, and before that it causes a rise in unemployment and poverty rates, a decline in the growth rate, and a state of slowdown, depression and perhaps paralysis!
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Economics