Stagflation
Stagflation is weak or falling economic growth combined with high inflation and often rising unemployment. It is hard for central banks, because fighting inflation with higher rates also weakens growth.
Stagflation is the uncomfortable mix of high inflation with weak growth and rising unemployment. It is hard for central banks because the usual cure for one problem makes the other worse.
- Category
- Fundamentals and Macroeconomics
- Reading time
- 3 min
- Also called
- Stagnation with inflation, Inflationary recession
- Updated
Stagflation in plain words
The 1970s are the classic example: economies were hit by high inflation and slow growth at the same time — stagflation.1
Federal Reserve Education explains that when high inflation comes with high unemployment and slow economic growth, it's called stagflation.2
There's no single official definition, but it means weak output and stubbornly high inflation happening together.3
How to spot stagflation
Check inflation
Look for high or rising inflation, one half of both inflation and slow growth.1
Check growth
Look for weak or falling GDP.
Check jobs
Rising unemployment with inflation is the classic sign.2
Look for supply shocks
Look for a supply shock — in the 1970s, it was the oil embargo announced in October 1973.3
Assess policy
Check monetary policy — in the 1970s it was too loose.2
Watch the response
Watch the policy response — under Volcker, the Fed raised rates sharply soon after he took office.2
Worked examples
Example 1 — Oil shock
StagflationA hypothetical oil price spike pushes inflation to 8% while growth falls to 0.5%.
| Inflation | 8% |
| GDP growth | 0.5% |
Like 1973, when an oil embargo triggered the episode, supply shocks can cause stagflation.3
Example 2 — Policy dilemma
Hard choiceA hypothetical central bank faces 7% inflation and 6% unemployment.
| Raise rates | Fights inflation |
| Cut rates | Helps jobs |
The Volcker Fed chose to raise the federal funds rate a lot, accepting short-term pain.2
Example 3 — Not stagflation
Overheating insteadHypothetical inflation is 5% but growth is a strong 3%.
| Inflation | 5% |
| Growth | 3% |
Stagflation needs both inflation and slow growth; strong growth rules it out.1
Stagflation vs recession
| Aspect | Stagflation | Ordinary recession |
|---|---|---|
| Inflation | High | Usually falling |
| Growth | Weak | Negative |
| Policy fix | Conflicted | Rate cuts |
| Typical cause | Supply shocks | Demand slump |
Why it matters
Macro outlook
Compare with a normal Recession.
Inflation hedging
Consider Treasury Inflation-Protected Securities and Real Yield.
Policy watching
Follow Central Bank reactions.
Portfolio stress tests
Test Portfolio Allocation for high inflation plus low growth.
Advantages and disadvantages
Advantages
- Clear warning label for policy dilemmas.
- Highlights supply-shock risk.
- Useful stress scenario.
Disadvantages
- No unique definition.
- Rare, so data are thin.
- Painful for both stocks and bonds.
- Policy fixes are costly.
Going deeper
Read as far as you need. Each level builds on the one before it.
Meaning
Beginner
Stagflation means both inflation and slow growth.1
1970s lesson
Intermediate
Loose monetary policy and the 1973 oil embargo combined to produce the 1970s episode.3
Measurement
Advanced
With no single definition, analysts usually look for stagnating output and persistently high inflation at the same time.3 The ECB tests expectations for high inflation and weak growth over at least two years.
Common mistakes
Calling any inflation stagflation
Growth must be weak too.
Expecting quick rate cuts
Inflation limits easing.
Holding only long bonds
Inflation hurts them.
Ignoring supply shocks
They often start it.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- Stagflation is inflation plus stagnation.
- The 1970s are the classic case.
- Supply shocks often trigger it.
- Policy faces a dilemma.
- There is no unique definition.
Frequently asked questions
Is stagflation likely now?
What assets do well?
Who coined the term?
Further learning
- Inflation
One half of the problem.
- Recession
The growth side.
- Treasury Inflation-Protected Securities
Inflation protection.
- Federal Reserve
The Volcker response.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- International Monetary Fund (Finance & Development). What Is Keynesian Economics? (opens in a new tab) Checked .
- Federal Reserve Education. Stagflation in the 1970s (opens in a new tab) Checked .
- European Central Bank (ECB). Does the private sector foresee a stagflation episode? (Economic Bulletin 4/2022) (opens in a new tab) Checked .
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