Stagflation describes the combination of stagnant economic growth, high unemployment, and high inflation. The term became especially associated with the United States and other advanced economies during the 1970s.
The episode challenged the simple assumption that inflation and unemployment always move in opposite directions. Major oil-price shocks, supply disruptions, weak productivity growth, wage and price pressures, and shifting expectations all contributed to the difficult environment.
Stagflation creates a policy dilemma. Raising interest rates may reduce inflation but can further weaken output and employment. Stimulating demand may support activity but risk worsening inflation. Policymakers therefore have to judge whether price increases come mainly from demand, supply constraints, or expectations.
The word combines “stagnation” and “inflation.” It is distinct from deflation, which means a sustained fall in the general price level, and from disinflation, which means inflation is slowing even though prices may still be rising.