Conversely, prioritizing growth through fiscal measures can amplify inflationary pressures. Achieving equilibrium demands a nuanced approach since measures designed to tackle one aspect could aggravate the other. Additionally, the effectiveness of policies hinges on factors such as economic structure, external dynamics, and public sentiment. In the U.S., the 1970s stand out as the singular period of stagflation in recent history.
In the decades since, there hasn’t been a time when those three factors—high inflation, slow economic growth, and a rapid rise in unemployment—occurred simultaneously and for a prolonged period. A long-lasting surge in prices has been quite rare in modern history and until this year, the inflation rate hadn’t been above 5% for 6 months or more since the 1980s. Experts say that such periods of sustained, high inflation are most likely caused by either a global supply shock or poorly-guided economic policies. If you look at the U.S. data, you can see a clear trend from 1972 to mid-1975 with inflation really going up.
The economy could still face a recession as soon as this summer
Governments eventually had to shift economic policies to try to control both inflation and unemployment. Stagflation is one of the trickiest economic conditions to deal with. It’s when high inflation, slow economic growth, and high unemployment happen at the same time. This unusual mix creates a tough situation for governments, businesses, and individuals. Unlike typical inflation or a regular recession, stagflation is especially challenging because the usual tools to fix one problem can make the other ones worse.
Poor Economic Policies
Factors such as supply chain disruptions, geopolitical tensions, and unprecedented monetary policies have contributed to inflationary pressures and economic uncertainty, raising fears of a stagflationary environment. Understanding stagflation helps consumers, investors, and businesses prepare for complex market conditions — and highlights the challenges central banks face in maintaining a stable economy. Even before the U.S. attack on Iran increased economic uncertainty, economists predicted it would decline again, leading to stagnant economic growth or even a recession. Central banks can adjust interest rates to try and control inflation. However, this is tricky during stagflation because raising interest rates to fight inflation can slow down the economy even more. In the 1970s, the Federal Reserve responded to stagflation by increasing government spending to achieve full employment, resulting in higher inflation.
Effects of stagflation on your investments
If you sell, you may be lucky enough to miss big market drops, but you will also miss out on the recovery. Volatile markets during economic uncertainty sometimes produce days with very high returns. With stagflation, those methods used to improve the economy can also cause more inflation, which has the potential to make the situation even worse. Combine that with inflation, and you get stagflation, which is very much on the minds of policymakers in Washington, D.C. Understanding these can help investors and policymakers navigate this tough environment. Some industries, like food, healthcare, and education, have done well during Stagflation because people always want these services.
“The tariff policies and deportations that have been put in place, and the current budget bill being debated in Congress, are predicted to create inflation,” he said. The Knowledge Academy is a world-leading provider of professional training courses, offering globally recognised qualifications across a wide range of subjects. With expert trainers, up-to-date course material, and flexible learning options, we aim to empower professionals and organisations to achieve their goals through continuous learning.
Will China’s economy soar in the Year of Loong?
Amid ongoing trade policy shifts and geopolitical uncertainty, concerns about stagflation have reemerged as a key macroeconomic risk. This paper develops a probabilistic framework to estimate the likelihood of stagflation versus soft landing scenarios over a four-quarter horizon. Building on Bekaert, Engstrom, and Ermolov (2025), the model integrates survey forecasts, structural shock decomposition, and a non-Gaussian BEGE-GARCH approach to capture time-varying volatility and skewness. Results suggest that the probability of stagflation was elevated at around 30 percent in late 2022, while the chance of a soft landing was below 5 percent.
Investing
This creates a tough environment for both governments and individuals to manage. Understanding its causes, effects, and potential solutions is crucial for navigating these difficult times. Recessions are often triggered by demand-side factors, and stagflation typically results from supply-side shocks coupled with expansionary monetary policies.
This devaluation, while potentially making exports theoretically cheaper, often exacerbates domestic inflation by increasing import costs. He noted that the Fed has responded by maintaining interest rates at around 4.5% to mitigate inflation. It’s also revising economic projections to reflect slower growth and higher inflation through 2025. Santangelo said the goal is not to contribute to either inflation or recessionary pressures, so much as to steady the economy. He noted that although the consumer price index, which tracks the cost of living for the typical household, only went up slightly last month, there’s generally a lag time before things like tariffs make an impact.
During a recession, government and Federal Reserve leaders have several options to boost the economy, including lowering interest rates and implementing new programs to stimulate spending. To mitigate the risk of stagflation, governments implement a range of economic, monetary, and fiscal policies; however, these measures do not always align effectively. In the 1970s, gold and other precious metals emerged as reliable traditional hedges. Commodities, especially oil amid an embargo, and those with limited supply, performed strongly. Real estate, less correlated to stocks, also served as a robust hedge.
- Real estate, particularly where rents can be adjusted to reflect inflation, can offer a degree of inflation protection.
- This leads to a vicious cycle of reduced hiring, layoffs, and even business closures.
- Typically, inflation and unemployment have an inverse relationship when inflation goes up, unemployment tends to drop, and vice versa.
- Stagflation is a double whammy of economic woes that combines lethargic economic growth (and, typically, high unemployment) with escalating inflation.
- “After surging in 2020 on government income support for the COVID shock, the U.S. broad money supply is falling for the first time since the late 1940s,” Wieting says.
Profit and prosper with the best of Kiplinger’s advice on investing, taxes, retirement, personal finance and much more. Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more – straight to your e-mail. Stagflation is uncommon, but it has happened a couple times in the last several decades. The most notable case of stagflation took place in the 1970s, afflicting most Western economies. While the U.S. has sidestepped another bout of stagflation since the 1970s, some commentators have drawn parallels between that episode and recent dynamics in the economy. Modern economics can be described only slightly tongue-in-cheek as a continuous battle over the causes of the stagflation of the 1970s.
- Remember, even doctors may see their income decline during stagflation.
- When productivity falls, the cost of goods and services rises, contributing to inflation.
- It tends to persist longer than a recession because it is so much harder to combat.
- The roots of inflation can be traced to various causes, including heightened demand, scarcity in supply, and variations in production costs.
- It’s when high inflation, slow economic growth, and high unemployment happen at the same time.
But, like many other economic events, there’s no bulletproof formula when it comes to predicting inflationary pressure and unemployment rates in the economy — just some general catalysts that could contribute to it. For capital in the twenty-first century example, many people projected that inflation would spike after the financial crisis due to the government stimulus that took place — and it certainly would have made economic sense — but it didn’t happen. A big policy change is going on with tariffs and trade policy, implemented by the federal administration. Individuals could conclude that policy changes of this type would lead to higher unemployment and potentially lower economic activity.
This was the case in the 1970s when world food shortages met increased energy costs. There were signs of possible stagflation during the early 2020s, but as economists and analysts know, it’s much simpler to define trends and eras in the rearview mirror than in real time. Severe supply constraints and labor shortages during the COVID-19 pandemic pushed inflation as high as 9%. Russia’s invasion of Ukraine and—in a repeat of history—production cuts by OPEC kept oil and fuel prices high. That’s according to Torsten Sløk, the chief economist at Apollo Global Management, who thinks the US is at a critical inflection point for stagflation, a dire scenario in which economic growth slows while inflation remains high.
Improve Professional Marketability
Simultaneously, these higher costs can lead to cuts in business investment and consumer spending, potentially slowing economic growth and leading to layoffs—the very definition of stagflation. Supply shocks, such as sudden increases in oil prices or disruptions in global supply chains, can trigger stagflation. These events can lead to higher production costs, which companies may pass on to consumers, resulting in inflation. Simultaneously, these increased costs can reduce economic output and employment, causing stagnation. Stagflation, a rare yet concerning economic issue, arises when high inflation and economic stagnation occur simultaneously. This results in rising prices, reduced purchasing power, and unemployment, leading to stagnation in economic growth.
This widespread household distress, however, is merely a symptom of a much deeper, systemic economic challenge. Inflation is an economic measure of how the value of a currency changes over time. Central banks like the United States Federal Reserve, European Central Bank, and Bank of England typically aim for a 2% annual inflation rate. The consumer price index (CPI) serves as a tool to assess the price changes of a selected basket of essential goods and services within a specific country. The harmonized index of consumer prices (HICP) for the eurozone provides a standardized measure of inflation across EU Member States.
