In the 1970s, something happened that economists thought was impossible. Inflation and unemployment rose at the same time. The standard Phillips curve said they moved in opposite directions. Stagflation, a combination of stagnant growth and high inflation, broke that rule and forced a rethink of macroeconomic theory.

The trigger was a supply shock. OPEC embargoed oil in 1973, and crude prices quadrupled. Higher energy costs pushed up prices across the economy. At the same time, growth slowed and unemployment rose. Central banks faced a dilemma. Raising rates would fight inflation but deepen the recession. Cutting rates would support growth but worsen inflation. There was no good option.

The experience left a lasting mark. It convinced central banks to prioritize inflation control even at the cost of higher unemployment. Paul Volcker, chairman of the Federal Reserve from 1979 to 1987, raised interest rates to nearly 20 percent to break the back of inflation. It worked, but it triggered a severe recession. Since then, stagflation has been rare, though the 2022 surge in energy prices and inflation raised fears of a return.

Stagflation causes

• Supply shocks like oil embargoes
• Excessive money growth
• Wage-price spirals
• Poor policy responses
• External economic disruptions