Stagflation
What It Is
Stagflation is an economic condition where high inflation occurs simultaneously with stagnant economic growth and rising unemployment.
Why It Matters
It is one of the most difficult economic environments to manage because traditional policy tools often worsen one problem while trying to fix another.
How It Happens
- Supply shocks raise prices
- Productivity declines
- Economic growth slows
- Unemployment rises
- Inflation remains elevated
Key Components
- High inflation
- Weak or negative GDP growth
- Elevated unemployment
- Policy trade‑offs
Example
The 1970s oil shocks triggered severe stagflation across the U.S. and Europe.
Key Takeaways
- Stagflation breaks the normal inflation‑employment relationship.
- It challenges both monetary and fiscal policy.
- Supply‑side reforms are often required to resolve it.