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What Is Stagflation?

What if prices keep rising while jobs shrink and the economy worsens too? That's stagflation—when two bad things that usually don't come together strike all at once.

What is stagflation?

Stagflation is a word combining 'stagnation' and 'inflation.' As the name suggests, it means a situation where three bad things happen at once: economic growth stalls, unemployment rises, and prices keep climbing.

Why is this special? Because usually these two don't come together. In economics there's a concept called the 'Phillips curve,' which held that prices and unemployment move in opposite directions—when prices rise (when the economy runs hot), unemployment falls, and conversely, when prices stabilize, unemployment rises.

But stagflation shatters this conventional wisdom. Prices rise and unemployment rises too—literally the 'worst of both worlds' overlapping.

The word 'stagflation' is said to have been coined by British politician Iain Macleod in a 1965 parliamentary speech, describing 'the worst situation of both inflation and stagnation together.'

Why is it so hard to handle?

The biggest problem is that 'the solutions conflict with each other.'

To tame prices, you usually have to raise rates and tighten money. But raising rates can reduce lending and investment, worsening the economy and increasing unemployment.

Conversely, if you cut rates and loosen money to revive the economy? This time, the already-high prices risk spiking even further.

In other words, it's a dilemma where trying to fix one side worsens the other, which is why it's the situation policymakers dread most. That's why stagflation is called a disease that is 'rare, but once it comes it hurts for a long time.'

A real case: 1970s America

The word stagflation spread widely because of 1970s America. Two 'oil shocks' pulled the trigger.

The first was in 1973. As OPEC (the oil-producing nations) blocked oil exports, the price of crude jumped roughly fourfold in a short time. The second was in 1979, when the Iranian Revolution again sent oil prices soaring. As energy prices rose, the prices of almost all goods rose along with them.

As a result, inflation exceeded 12% in 1974, and by around 1980 it soared to roughly 14–15%. Yet the economy was in fact in recession, so unemployment was high too. In 1975 it was about 9%, and during the 1981–82 recession it topped 10%. Prices and unemployment were both bad at the same time.

Historical figures vary slightly by source and compilation date. Understand the inflation peak as roughly 14–15% and the unemployment peak as roughly the 9–10% range.

How did they get out of it?

In the end, the United States chose to 'tame prices first, for certain.' Then-Fed Chair Paul Volcker raised rates very aggressively starting in 1979. The benchmark policy rate rose to around 20% at one point.

The price was steep. Raising rates so sharply brought a severe recession in 1981–82, and unemployment topped 10%. But after enduring this pain, inflation fell below 3% by around 1983.

The lesson here is that you can't escape stagflation 'for free.' Taming prices often requires paying the cost of a recession. For long-term investors, the important thing is to know in advance that asset prices can swing greatly during such phases.

常见问题

Q. What's the difference between stagflation and plain inflation?

Ordinary inflation often occurs when a good economy raises demand and pushes up prices. In such times jobs usually increase too. By contrast, stagflation is a situation where prices rise even though the economy is bad and unemployment is climbing. A representative cause is a 'supply-side shock,' such as a surge in oil or raw-material prices, that raises costs and pushes prices up.

Q. If stagflation comes, how should I invest?

There's no correct answer that 'buying this will go up in such times.' Recommending a specific asset is not something this site does. That said, historically both stocks and bonds have suffered large drawdowns and long loss durations during stagflationary phases. So it's important to spread your assets, check the maximum drawdown and recovery period in advance, and build a plan you can endure for the long term.

Q. Could stagflation happen again now?

The possibility always exists, but the future can't be asserted or predicted. That said, history shows that a large supply shock, like an oil shock, can create similar pressure. What matters is not prediction but the habit of preparing so you can endure whatever phase comes.

What Is Stagflation?