Stagflation combines two problems that are not supposed to happen together: high inflation and stagnant growth. Prices rise while the economy stalls. Unemployment stays high. Traditional tools struggle to fix both at once.

The term entered the vocabulary in the 1970s. Oil shocks pushed costs up. Governments responded with stimulus, which fed inflation. Central banks faced a dilemma. Raising rates would fight inflation but deepen the recession. Cutting rates would help growth but worsen inflation.

Stagflation is painful and politically toxic. Workers see paychecks lose value. Businesses face rising costs and weak demand. Governments lose popularity. The 1970s episode ended only after central banks raised rates sharply, causing a severe recession but breaking the inflation spiral.

Key features

• High inflation
• Slow or negative growth
• High unemployment
• Supply shocks
• Policy dilemma