Stagflation

Stagflation is an economic condition in which inflation is high while growth is slow or negative and unemployment is high. It was a puzzle for economists because the standard view, the Phillips curve, suggested that inflation and unemployment trade off against each other, so they should not rise together.

The term came into use in the 1970s, when the U.S. and other countries faced oil price shocks (in 1973 and 1979) and rising inflation along with weak growth. The experience discredited some Keynesian ideas in the eyes of many economists and helped advance monetarism and supply-side economics. Federal Reserve Chairman Paul Volcker ended it in the early 1980s by raising interest rates sharply, which caused a severe recession.

Stagflation is hard to fight because policies that reduce inflation, such as higher interest rates, tend to weaken growth, and those that boost growth risk adding to inflation. Observers warn about stagflation risks when supply shocks hit, as after 2021 and in discussions of tariffs; economists disagree about whether recent episodes qualify, since unemployment stayed low. It is closely tied to the history of inflation and to arguments over monetary-policy.