Stagflation – an economic phenomenon characterized by the simultaneous occurrence of stagnation in economic growth, high unemployment, and high inflation – is a troubling combination that challenges conventional economic theory and policy responses.



As taught in basic principle economics classes, the Phillips curve depicts the relationship between inflation and unemployment being inverse, that is, higher inflation is associated with lower unemployment and vice versa. Yet the occurrence of stagflation, which was originally thought to be impossible, breaks all convention, leaving policy makers stumped. Fight inflation? You might make unemployment worse. Try to create jobs? You could send prices even higher.



The term shot to fame in the 1970s when the U.S. and other major economies were shaken after OPEC's oil embargo sent energy prices through the roof. Suddenly, everything from manufacturing to transportation became more expensive, businesses cut back, and unemployment lines grew longer – all while prices kept climbing.



So what causes this “perfect economic storm”? There are several culprits that are typically determined to be behind it:Supply shocks: When essential resources like oil or food suddenly become scarce or expensive, they drive up costs across the entire economy while reducing production.



Policy missteps: Sometimes governments or central banks make things worse with poorly timed decisions, like tightening money supply during a slowdown.



Productivity problems: If an economy has underlying structural issues – outdated industries, excessive regulations, or rigid labor markets – it can't adapt quickly enough when trouble hits.



Wage-price spirals: Workers demand higher wages to keep up with inflation, companies raise prices to cover higher wages, and the cycle continues.

Fixing stagflation is like a ‘pickle’ in baseball. Raise interest rates to fight inflation, and you might crush economic growth further. Stimulate the economy, and inflation could spiral out of control. Either way, you’re in a pickle.



References:



Team, The Investopedia. “What Is Stagflation, What Causes It, and Why Is It Bad?” Investopedia, Investopedia, www.investopedia.com/terms/s/stagflation.asp. Accessed 11 Mar. 2025.