Another very dangerous scenario is called stagflation, a word formed by stagnation + inflation. That is, a situation in which, despite being in a stagnant economy or recession, there is a high inflation, which may be caused not by the pressure of demand (that being in recession is not very strong), but on the supply side, for example, the rise in raw materials. A classic stagflation scenario occurred with the 1973 oil crisis, in which the price of oil quadrupled, causing high inflation and also contributing to economic stagnation and rising unemployment. Stagflation is a very dangerous situation, and that despite the economic stagnation, prices are still fired, which can generate a vicious circle difficult to start, because if you try to stimulate the economy by increasing public spending, higher inflation can produce , and if it is attacked by the other side, and trying to contain prices by raising interest rates may slow down the economy even more. Deflation occurs when there is a continued fall in prices, usually defined (as with the recession) when given this fall for two consecutive quarters.
Falling prices, which in principle might seem not so bad, it's a very difficult scenario if it occurs continuously in time, ie if there is deflation, "as it can produce a spiral in which consumers postponing their buying decisions, waiting for prices to fall over (as happened in the lost decade in Japan), which demand and prices continue to fall, unemployment rises and the country as a whole is impoverished. Note: According to the leading indicator yesterday, the Spanish of harmonized inflation rate fell to 0.1%, which while not technically deflation, is the first step. The situation is more severe and more prolonged in time would the Depression, which we have an example in 1929. In that case only recovered the initial levels with World-war – News ResultsWorld War II, from the ground up The Daily Commercial – Feb 28 05:16amWorld War II — USO San Mateo Daily Journal – Feb 28 03:33amLast US World War I veteran dies at 110: report AFP via Yahoo! News – Feb 27 11:20pmWorld-war – Video ResultsPlay Video’>World War II (sixteen years later.) Technically it is usually defined as three years of recession or as an annual fall of GDP higher than 10%. In this situation, economy falls over a long period, consumption and investment remain weak over time, there is a high level of unemployment, and destroyed many jobs, "and as Keynes predicted, may be becoming less useful monetary policy ( lower interest rates) and fiscal policies be essential to stimulate the economy (lower taxes and increase public spending).