What is stagflation?
Stagflation blends stagnation and inflation: an economy where output and jobs shrink while prices rise. British politician Iain Macleod used the word in a 1965 House of Commons speech, and it became common after the oil crises of the 1970s.
📌 At a glance
- Components
- Weak growth + rising prices (+ high unemployment)
- Classic case
- Advanced economies after the 1973 and 1979 oil shocks
- Main causes
- Supply shocks, entrenched inflation expectations
- Policy problem
- Fighting inflation and supporting growth conflict
Causes
- Supply shocks: a sharp rise in the price of an essential input such as oil raises costs, pushing prices up and output down.
- Expectations: if people expect high inflation to continue, wages and prices rise together and inflation becomes entrenched.
The Phillips curve debate
Until the 1960s many policymakers relied on the Phillips curve trade-off between unemployment and inflation. The 1970s, when both rose together, supported Milton Friedman’s (1968) argument that the trade-off does not hold in the long run once expectations adjust.
Frequently asked questions
- What is stagflation?
- A period of stagnant growth and high unemployment combined with high inflation, seen most famously in the 1970s.
- Why is stagflation hard to fix?
- Raising interest rates to fight inflation can deepen the slump, while stimulus to boost growth can add to inflation.
References
- Friedman, M. (1968). The role of monetary policy. American Economic Review, 58(1), 1–17.
- Blinder, A. S. (1979). Economic policy and the great stagflation. Academic Press.