What is stagflation?
March 16, 2023 5 min read
Stagflation describes an economic period where high inflation and stagnant economic growth happen at the same time.
Learn more about the history of stagflation, what might cause it and what you can do to prepare for all kinds of economic changes.
- The word stagflation is a combination of “stagnation” and “inflation.”
- Stagflation is a term for an extended period of rising prices, low consumer demand, high unemployment and slow economic growth.
- Stagflation may be triggered by a complex combination of factors, including supply chain shocks, monetary policy and fiscal policy.
Stagflation definition and examples
Stagflation is a combination of the words “stagnation” and “inflation.” To better understand stagflation, it’s helpful to know what those words mean in an economic context.
- Stagnation is a time of little to no economic growth that often coincides with high unemployment.
- Inflation is when the overall price of goods and services increases. If one specific product or service gets more expensive, that doesn’t point to inflation. Inflation happens when prices of many goods and services in an economy generally go up over time.
In short, stagflation is an economic period characterized by high inflation, low consumer demand, relatively high unemployment, and slow or no economic growth.
Because of an economic model called the Phillips curve, some economists used to think that inflation and unemployment had a predictable, inverse relationship. The common belief was that when inflation goes up, unemployment goes down. And when unemployment goes up, inflation goes down.
This led many economists to think that stagflation was impossible—or at least extremely unlikely. Then, the country’s first major stagflation period—known as the Great Inflation—happened in the 1970s.
What’s the difference between stagflation and inflation?
Inflation is one part of stagflation. But inflation can also happen in periods of economic growth.
During periods of inflation, prices of things like food, transportation, education, gas and housing rise over a sustained period of time. But periods of inflation aren’t typically accompanied by the other hallmarks of stagflation, like high unemployment.
What’s the difference between stagflation and a recession?
Recessions happen when the economy experiences a pervasive and significant economic decline that lasts more than a few months. Like stagflation, recessions might also be marked by high unemployment. But unlike stagflation, recessions usually aren’t accompanied by inflation.
What causes stagflation?
Economists still debate the exact causes of stagflation. After all, economies are complex. And it can be difficult to pinpoint the triggers of any economic change. But supply chain issues, monetary policy and fiscal policy are a few potential causes of stagflation.
Supply chain issues
Economists often point to supply chain issues—specifically supply chain shocks—as drivers of stagflation. Supply chain shocks are when an event—like a pandemic or war—causes a sudden change in the supply of certain products or services.
When supply chain shocks happen, consumer demand for a product can quickly exceed its available supply. And that can cause the price of that product to rise.
For example, some economists point to the oil supply shock—and subsequent rise in gas prices—during the Great Inflation as a partial explanation for that period’s stagflation.
Monetary policy describes the actions the Federal Reserve takes to reach economic goals, like stabilizing prices and interest rates. And monetary policy might also contribute to stagflation.
Some economists argue that the Federal Reserve didn’t do enough to course-correct during the Great Inflation. And that may have contributed to stagflation.
Fiscal policy refers to the ways the executive and legislative branches of the federal government work to influence the economy. Fiscal policy can include things like lowering or raising taxes, adjusting government spending, and sending stimulus checks to individuals.
How can you prepare for stagflation?
- Create a budget. Building a budget and finding ways to reduce expenses can help you manage spending regardless of what’s happening with the economy.
- Build an emergency fund. Putting money into an emergency fund can help you feel prepared to navigate hard times.
- Pay down debt. Getting out of debt could help ease some strains on your budget. And it’s important to know that it’s still possible to save money while paying down debt.
- Make yourself marketable. When unemployment rates rise, people might worry about their job security. Updating your resume and figuring out how to navigate your finances during a layoff can help you prepare for the possibility of losing a job. Learning how unemployment insurance works might be a good idea too.
Stagflation in a nutshell
It can be difficult to predict exactly how economies will change over time. And stagflation is just one possible consequence of shifting prices, demand and employment.
But whether you’re worried about stagflation or not, there are steps you can take to protect your finances and learn how to navigate financial emergencies. That way, you’re more prepared for whatever comes your way.