An economic theory maintains that there is an inverse relationship between inflation and unemployment, commonly known as the Philips curve. High inflation is associated with low unemployment and vice-versa. However, emerging and developing economies experienced the first global wave of debt accumulation in 1970s. Low global real interest rates coupled with rapid development of loan markets made the countries debts increase, especially in Latin America and many other low-income countries. Following this, economic growth slowed down, unemployment started to rise and inflation became a common phenomenon. This was what global economies experienced in 1970s, a new phenomenon which was not observed before. This new phenomenon is known as stagflation.
Ethiopian Sunday market
Stagflation, however, has not been a phenomenon in Ethiopian economy at least until the mid-2010s. The economy has been experiencing high inflation in recent years, visible not only in the rise of prices of goods and services, but also its fast pace of change is very fast. This is the signal that Ethiopian economy is under the state of running inflation in which the economy is running with a two-digit inflation rate. On the other hand, sporadic ethnic-based conflicts in different regions of the country and the ongoing armed conflict between the Federal Government and TPLF have further weakened the country’s economic growth, leading to low employment- to – population ratio of 59.5%, with increasing trend of unemployment between 2005 and 2022. Hence, the current recent Ethiopian economic performance showed that the economy is on the verge of stagflation, and the Ethiopian Government should take appropriate measures including supply-side solutions to rescue the economy from total collapse.
