Definition
Stagflation is a macroeconomic condition in which an economy suffers stagnant or shrinking output and high unemployment at the same time as high inflation. The word combines stagnation and inflation, two problems that economists once believed could not occur together.
The classic example is the 1970s, when oil-price shocks pushed prices up across many countries while growth slowed and joblessness rose. That episode forced economists to revise the simple trade-off they had assumed between inflation and unemployment.
Why it matters
How it works
Stagflation typically begins with an adverse supply shock — a sudden rise in the cost of a key input such as oil. Higher costs shift short-run aggregate supply inward, raising the price level while cutting output and employment. Both bad outcomes appear at once.
The dilemma is that demand-side tools work against each other here. Stimulus to revive growth feeds further inflation; tightening to curb inflation deepens the recession. Lasting relief usually requires supply-side measures and credible commitment to price stability so that expectations do not become self-fulfilling.