Stagflation
Plain definition
Stagflation is the painful combination of stagnant economic growth, high unemployment, and high inflation occurring at the same time. It defies the usual trade-off in which weak growth brings low inflation.
In economics
Stagflation breaks standard policy tools: stimulus to fight unemployment worsens inflation, while rate hikes to fight inflation deepen the slump. The classic cause is an adverse supply shock — the 1970s oil embargoes quadrupled energy costs, shrinking output while raising prices. The 1970s episode discredited simple Phillips-curve thinking and pushed central banks toward credible, inflation-first mandates.
Example
In 1974-75, the U.S. suffered a recession (unemployment near 9%) while inflation ran above 11% — the opposite of the normal pattern, where recessions cool prices. The Fed faced an impossible choice, and only the painful Volcker rate hikes of the early 1980s finally broke the inflation leg.
Stagflation is often confused with ordinary recession or with high inflation alone. A recession with falling prices is deflationary, not stagflationary; high inflation during a boom is overheating, not stagflation. True stagflation requires all three — stagnation, joblessness, and rising prices — simultaneously, which is why it is so dreaded.