Stagflation

What is stagflation?

Stagflation is an economic condition with persistent high inflation combined with high unemployment and relatively stagnant demand for products.

Typically, high inflation is correlated with lower unemployment rates. However, with stagflation, both inflation and unemployment are high.

What causes stagflation? Economists believe it’s linked to a supply shock that results in a rapid increase in prices, or government policies that increase the money supply too quickly. However, the causes of stagflation are not well understood.

Monetary policy and fiscal policy are not very effective at countering supply shocks. Also, policies designed to lower inflation typically increase unemployment in the short run, but policies aimed at reducing unemployment in the short run lead to higher inflation in the long run. That means that, even if the cause of stagflation is not a supply shock, policy can’t handle both issues at once.

In the video, we’ll cover the most famous example of stagflation in modern economic history: the United States in the late 1970s through early 1980s.

Want to learn more about unemployment and inflation? Head on over to our Macro sections on Unemployment and Labor Force Participation and Inflation and Quantity Theory of Money.