Stagflation

Stagflation is a particularly challenging economic scenario where slow or negative economic growth coexists with rising prices and elevated unemployment. This combination was once considered theoretically impossible — traditional Keynesian economics assumed inflation and unemployment moved inversely (the Phillips curve). The term gained prominence during the 1970s oil crises, when OPEC oil embargoes triggered supply shocks that simultaneously raised prices and slowed growth. U.S. inflation exceeded 14% while unemployment rose above 7% and GDP stagnated. Stagflation is exceptionally difficult for policymakers because the standard tools work at cross-purposes: raising interest rates to fight inflation further slows growth and increases unemployment, while stimulating the economy to reduce unemployment risks accelerating inflation. Fed Chair Paul Volcker ultimately broke 1970s stagflation by raising rates to nearly 20%, triggering a severe recession but finally taming inflation. Supply-side shocks (energy prices, supply chain disruptions, commodity shortages) are the most common triggers.