Imagine a scenario where your grocery bills keep rising, but your salary remains stuck at the same level. At the same time, job openings are scarce and the overall economy seems to be sputtering in neutral. That’s not just inflation or recession; it’s a rare and painful mix known as stagflation. 

Stagflation is a particularly unsettling economic phenomena because it combines three bad conditions at once: rising prices, weak economic growth, and high unemployment. For economists and policymakers, it presents a dilemma: the tools to fight inflation tend to worsen unemployment, and vice versa.  

In this post, we’ll explain exactly what stagflation is, how it arises, historical episodes, how it’s measured and why it’s so hard to address. We’ll also discuss how real the risk of stagflation is in 2025. 

Key Points 

• Stagflation is the rare combination of rising inflation, weak growth, and high unemployment, making it one of the hardest economic conditions to resolve. 
• Historical episodes, such as the 1970s oil shocks, highlight how supply disruptions, policy missteps, and structural weaknesses can trigger stagflation. 
• In 2025, risks remain from sticky inflation, trade frictions, and slowing growth, but stronger policy tools and diversified economies may limit its severity. 

What Is Stagflation? A Definition 

A portmanteau of stagnation and inflation, stagflation is defined as an economic environment in which: 

1. Prices are rising (inflation), 

2. The economy is stagnating or contracting (zero or negative growth), 

3. Unemployment is elevated. 

This is an unusual combination. In a typical business cycle, economies face either inflation (in expansions) or rising unemployment (in recessions). Stagflation mixes both simultaneously, defying what’s known as the Phillips Curve. 

As explained in economics, the Phillips Curve describes trade-offs found under conventional economic conditions. When unemployment is low, inflation tends to rise because demand is strong; when unemployment is high, inflation usually falls because demand is weak.  

However, stagflation breaks this rule of thumb because both inflation and unemployment rise together. This leaves policymakers without an easy solution. 

The term started appearing in economic discourse by the late 1960s and gained wide attention during the 1970s oil shock period. It became especially prominent when many Western economies experienced persistent inflation and stagnation together. 

Key Characteristics of Stagflation 

To identify stagflation, economists rely on three hallmark features.  

1. High inflation alongside stagnant or weak growth 

One of the defining markers of stagflation is when prices rise rapidly even though the economy is not expanding.  

Normally, inflation is tied to strong demand in a growing economy, but during stagflation, people face higher costs for essentials like food, fuel, and housing even while wages and employment fail to keep up. 

This creates what economists call “cost-push inflation”, where higher production costs spill over into higher consumer prices. As businesses struggle to cover costs, investment often slows, further weakening growth. The end result is an economy caught in a squeeze: no growth, but rising living expenses. 

2. Rising unemployment despite inflation 

Another defining feature of stagflation is that joblessness rises at the same time as inflation.  

In healthy growth periods, inflation usually pairs with low unemployment, since more demand creates more jobs. But stagflation breaks this pattern. Businesses often cut back on hiring or lay off workers because their costs are rising and demand is falling.  

For households, this creates a double burden: not only do they face fewer job opportunities, but the money they earn buys less. This makes stagflation particularly painful on a personal level compared to a “normal” recession. 

3. Persistence and resistance to standard policies 

Perhaps the most frustrating aspect of stagflation is how resistant it is to typical government and central bank responses. 

When inflation alone is the problem, raising interest rates usually works to cool demand. When unemployment is the issue, stimulus spending or lower rates usually help spur growth.  

But in stagflation, these levers pull in opposite directions – tightening monetary policy by raising interest rates can make borrowing more expensive, causing businesses to shed headcount and worsen job losses. 

Meanwhile, stimulating demand by lowering interest rates (which makes money more available, thereby encouraging spending) risks driving prices upwards, fueling even more inflation.  

This is why stagflation tends to last longer than a standard downturn and is considered one of the most difficult economic conditions to resolve. 
 
Related articles: Higher for Longer What the Fed’s Cautious Stance Means for Markets in 2025 and Beyond 

Normal Inflation vs Recession vs Stagflation 

Here’s a side-by-side comparison between inflation, recession and stagflation to clarify the differences and key characteristics of each economic phenomenon.  

	Economic Growth	Inflation	Unemployment	Typical Policy Response
Normal inflation	Positive to moderate	Rising	Low to moderate	Raise interest rates
Recession	Negative or weak	Low/Falling	High	Fiscal stimulus, tax cuts
Stagflation	Weak, zero or negative	High	High	Difficult trade-off (conflicting tools)

Causes of Stagflation 

Stagflation doesn’t have a single definitive cause. Rather, it reflects the interaction of several adverse factors. Below are key drivers, including some newer ones that have recently come into prominence. 

• Supply shocks 

Sudden disruptions in the supply of essential goods like oil, food, or raw materials can drive up costs across the economy. When producers pay more for raw materials, energy and other essential resources necessary for production, they often pass those costs on to consumers in the form of higher prices.  

At the same time, production slows because goods are more expensive or harder to obtain, dragging down growth. A classic example is the 1973 oil crisis, when OPEC cut supply and global energy prices spiked, leading to widespread stagflation. More recently, the COVID-19 pandemic highlighted how fragility in supply chains can create inflationary pressures even when demand is weak. 

Related article: A Complete Guide to Supply and Demand: How to Use It 

• Policy missteps 

Sometimes stagflation is worsened – or even triggered – by government or central bank mistakes.  

If monetary policy is too loose for too long, it can flood the economy with cheap money, raising prices without stimulating real growth. Similarly, heavy fiscal spending or poorly designed subsidies may add fuel to inflation while failing to improve productivity.  

In the 1970s, many countries tried to fight unemployment with aggressive spending, but the result was higher inflation without lasting economic improvement. Poorly timed or contradictory policies can lock an economy into the stagflation trap. 

• Structural problems 

An economy with problematic fundamentals can harbour deep-seated weaknesses that set the stage for stagflation.  

For example, if productivity growth slows, businesses may need more inputs just to maintain output, raising costs without improving efficiency. Rigid labour markets, where wages and job contracts cannot easily adapt to changing conditions, can worsen unemployment during downturns. Outdated industries or excessive regulation may further limit innovation and growth potential.  

These structural issues make it harder for an economy to recover once a stagflationary cycle begins. 

• Globalisation and supply chain dependency 

In today’s interconnected world, heavy reliance on international supply chains can make economies vulnerable to disruptions abroad. Think about how a factory shutdown in Asia or a shipping bottleneck in a key port can ripple across continents, raising costs and slowing production.  

Trade tensions, tariffs, or geopolitical conflicts can also push up prices for goods like semiconductors or agricultural products. Because these disruptions often happen suddenly, they can spark stagflation-like pressures even in otherwise stable economies. Globalisation has created efficiency, but it has also created fragility. 

Related article: How Tariffs Could Reshape Apple’s Supply Chain and Stock Outlook 

• Climate-related shocks 

As climate change accelerates, extreme weather events are increasingly disrupting the supply of vital goods such as food and energy. Droughts can reduce crop yields, storms can damage infrastructure, and heatwaves can raise energy demand, all of which push prices higher.  

Worryingly, climate-related disruptions are becoming more frequent and widespread, creating long-term uncertainty for both businesses and consumers. This raises the risk of inflation even when growth slows, especially in economies heavily reliant on agriculture or fossil fuels.  

In the coming decades, climate pressures could become one of the dominant drivers of stagflationary risk. 

Measuring Stagflation 

No single statistic captures stagflation. Instead, economists study a combination of indicators when measuring stagflation, including: 

• Inflation rates 

Economists track inflation through indicators like the Consumer Price Index (CPI) and the Personal Consumption Expenditures (PCE) index to see how quickly the cost of living is rising.  

In stagflation, these measures remain high even when demand is weak, pointing to underlying supply or cost pressures. Persistent inflation alongside slow growth is one of the strongest signals that the economy is entering stagflationary territory. 

• GDP growth trends 

Gross Domestic Product (GDP) is the main measure of how much an economy produces. During stagflation, GDP growth slows or contracts at the same time inflation stays high, an unusual pairing that alerts economists to deeper structural issues.  

By comparing GDP data with inflation, economists can confirm whether rising prices reflect healthy expansion or indicate potential stagflation ahead. 

• Unemployment rate 

The unemployment rate helps economists see whether businesses are creating or cutting jobs in response to economic conditions.  

In stagflation, unemployment rises alongside inflation, showing that companies are struggling with high costs and weak demand. This reversal of the usual inflation-employment trade-off is a key indicator that the economy is not just slowing but caught in a stagflation cycle. 

The “Misery Index” 

A simpler tool for measuring stagflation is the Misery Index. This is derived by adding the inflation rate and the unemployment rate together. A higher value on the Misery Index suggests more economic pain for citizens, and rising readings can signal coming stagflation.  

Economists also look at real wages (wage growth minus inflation) to see whether incomes are keeping up, and inflation expectations, which affect future wage and price-setting behaviour. 

Historical examples of stagflation 

1. United States in the 1970s 

The US experienced the most studied bout of stagflation during the 1970s.  

Following the 1973 oil embargo by OPEC, energy prices quadrupled, pushing up costs across the economy while slowing production. Inflation surged into double digits, unemployment climbed, and GDP growth faltered.  

Policymakers struggled to respond, as traditional stimulus risked feeding inflation further. It wasn’t until the Federal Reserve, under Paul Volcker, dramatically raised interest rates in the early 1980s that inflation was tamed, though at the cost of a severe recession. 

2. United Kingdom in the 1970s 

The UK faced similar challenges in the same decade, marked by high inflation, weak growth, and rising unemployment.  

A combination of oil shocks, powerful labour unions demanding higher wages, and strikes led to what became known as the “Winter of Discontent.” Inflation peaked at over 20% in the mid-1970s, while GDP growth stagnated.  

The government’s attempts to control wages and prices were largely unsuccessful, deepening public frustration. This period left a lasting mark on UK economic policy, spurring a determined move toward tighter monetary control in the 1980s. 

3. Emerging markets 

Several emerging economies have also faced stagflation-like conditions, often triggered by external shocks.  

In Latin America during the 1980s, for example, countries experienced high inflation combined with weak growth as debt crises and falling commodity prices hit hard. Similarly, some African nations faced stagflation when droughts reduced food supply and rising global energy prices pushed up import costs.  

Unlike advanced economies, these countries often lacked the policy tools and institutional strength to manage the crisis. As a result, stagflation in emerging markets has sometimes lasted longer and caused deeper social hardship. 

Related Article: Looking Beyond the US Asia and Emerging Markets in Focus 

Lessons Learned 

Collectively, a number of lessons can be drawn from the historical instances of stagflation seen so far, as follows:  

• Once inflation expectations become unanchored (i.e. people expect continuously rising prices), reversing the cycle becomes harder. 
• Policy must balance credibility: central banks must be seen as committed to controlling inflation, even if it means short-term pain. 
• Structural reforms (boosting productivity, flexibility) often matter more than ad-hoc stimulus. 

Impact of Stagflation on Economy and Daily Life 

Stagflation affects every level of the economy. Rising prices, weak growth, and higher unemployment strain businesses, households, and investors alike, making it one of the hardest economic conditions to endure. 

For Businesses 

For companies, stagflation is a particularly tough environment. On one hand, they face higher costs for inputs such as raw materials, fuel, and wages. On the other hand, consumer demand often falls as people cut back on spending due to rising living costs.  

This squeeze reduces profit margins and discourages investment, since businesses are reluctant to expand in an uncertain market. Over time, this can lead to reduced innovation and fewer job opportunities, reinforcing the cycle of weak growth. 

For Consumers 

Households often feel the impact of stagflation most directly. Prices for everyday necessities like groceries, rent, and energy rise quickly, while wages fail to keep pace. At the same time, unemployment is higher, so many families face reduced or unstable income.  

This combination erodes purchasing power and forces people to cut back on both essentials and non-essentials. The result is a sense of financial insecurity that can persist even after the economy begins to stabilise. 

For Investors 

Stagflation creates a challenging environment for financial markets, as both major asset classes – stocks and bonds – often face pressure. Inflation erodes the real value of fixed-income returns, while slow growth and weak demand weigh on company earnings. This leaves traditional portfolios under pressure.  

Historically, economists have noted that during stagflation, prices of commodities such as oil, gold, and agricultural products have sometimes risen alongside inflation, though performance varies widely and can be volatile. However, even these assets can be volatile, making it difficult to preserve value or maintain stability during prolonged stagflationary periods. 

Why stagflation is hard to solve 

Stagflation creates a policy dilemma (or a “policy trap”) because the fiscal tools used to combat inflation and recession conflict: 

• Monetary tightening (raising interest rates): helps contain inflation but further suppresses growth and increases unemployment. 
• Fiscal stimulus (government spending, tax cuts, lowering interest rates): can boost growth and jobs, but risks exacerbating inflation. 

To worsen the issue, inflation expectations can feed on themselves: once people expect inflation to continue, wage demands and price-setting behaviour may adjust accordingly, making inflation more persistent. 

This is why stagflation is particularly difficult to solve; policymakers are essentially stuck in place, and cannot go too far in one direction without inflicting further economic pain.  

In contrast, a typical recession is easier to solve. Policymakers can lower rates and stimulate  demand through monetary injections, encouraging consumer spending that eventually drives higher economic growth. This creates more jobs and raises wages, keeping consumer spending at healthy levels, bringing the economy out of recession.  

Related Article: Ways to Prepare Yourself for a Recession 

Stagflation in 2025 – Is it a Real Risk? 

Concerns over stagflation have resurfaced in 2025. Inflation remains sticky in several economies, while growth shows signs of slowing. Economists caution that, although conditions may not mirror the 1970s, the mix of trade frictions, policy risks, and softening labour markets keeps the threat alive. 

Current Signals And Economist Warnings 

In 2025, some economists and financial institutions are sounding alarms that stagflation could re-emerge, though likely in a milder form than in the 1970s.  

Inflation in many economies has proven more stubborn than central banks expected, staying above official targets even as growth slows. Recent trade disputes and tariff measures have added further pressure, raising import prices and straining global supply chains.  

At the same time, job markets are showing early signs of softening, with fewer new positions being created compared to the post-pandemic recovery years.  

Together, these developments suggest that stagflation may be making an unwelcome return in our modern times. 

Tariffs, Trade And Policy Risks 

Global trade tensions are adding fuel to stagflation concerns. When governments raise tariffs or impose restrictions, they effectively create a negative supply shock; goods become more expensive and harder to obtain.  

In early 2025, several economists, including U.S. Federal Reserve officials warned that protectionist trade measures could keep inflation elevated while slowing growth, increasing the risk of stagflation.  

Market analysts note that recent surveys suggest many expect stagnant growth and above-target inflation to persist. These dynamics make trade and policy choices especially important in determining whether stagflationary risks become reality. 

Related Article: How Trump’s Tariffs Affect the Economy and Long-Term Investors: Weathering the Storm 

How 2025 Differs from the 1970s 

While today’s economy faces risks that seem to echo stagflationary conditions, it is not a carbon copy of the 1970s era. Back then, energy dependency was far greater, and oil price shocks had an outsized, almost destabilising effect on economies.  

Today, although dependence on fossil fuels still poses vulnerabilities, energy markets are more diversified. The growth of renewables, strategic reserves, and multiple global sources make the system more resilient to a single large oil shock. 

Central banks now also have more advanced tools at their disposal, including explicit inflation targeting, forward guidance, better data, and more transparent communication channels. These improvements strengthen monetary policy credibility.  

This means that compared to the 1970s, central banks are more able to react to short-term inflation, reducing the likelihood of such surprises spiralling out of control.  

Another important difference lies in globalization and inflation expectations. In the 1970s, public expectations of inflation often became unanchored: people and firms came to expect persistent price rises, which fed into wage demands and pricing behavior – a self-reinforcing cycle that proved destructive.  

In 2025, central banks generally enjoy stronger credibility; while inflation has remained high at present, many measures of longer-term inflation expectations remain closer to target levels.  

Yet, because economies are more interconnected globally, disruptions from trade frictions, supply chain breakdowns, or geopolitical tensions can transmit inflationary pressures more quickly across borders – introducing fragility in different ways than during the more domestically centred challenges of the 1970s. However, it also goes the other way; global diversification can also provide buffers to limit the fallout from supply shocks. 

What Lies Ahead 

Given the significant differences between the 1970s and now, it follows that if stagflation does occur in the mid-2020s, it will be less severe than the crises of the 1970s.  

Growth is slowing, but not collapsing; inflation is elevated, but far below the double-digit peaks of fifty years ago. The greater risk lies in persistence: inflation staying above target for longer while growth remains lacklustre.  

For businesses, consumers, and policymakers alike, the challenge lies in navigating this uncertainty and preventing expectations of permanent stagnation from taking hold. 

Stagflation, a Destructive Force That May Yet be Tamed? 

Stagflation is one of the most challenging economic conditions that can impact the modern financial system because it combines the pain of inflation, stagnation, and unemployment all at once.  

History shows how disruptive it can be, and why it is so difficult to solve with standard policy tools. While today’s global economy is better equipped than it was in the 1970s, risks remain – from trade tensions to climate shocks – that could push growth and inflation in opposite but equally damaging directions.  

For households and businesses, understanding stagflation helps make sense of the trade-offs policymakers face and why uncertainty may linger in the years ahead.  

Overall there is reason to be hopeful. Given that the global economy has evolved to include new safeguards, better transparency and improved data, stagflation may yet be kept at bay.  

FAQs 

1. What is Stagflation? 

Stagflation is an economic situation where high inflation occurs alongside weak or negative growth and rising unemployment. It is considered unusual because inflation and unemployment typically move in opposite directions. 

2. What Causes Stagflation? 

There is no single cause of stagflation. It often arises from a combination of factors such as supply shocks, like a sharp rise in energy or commodity prices, which increase costs across the economy.  

Policy mistakes can also play a role, for example, when loose monetary or fiscal policy fuels inflation without improving growth. Structural weaknesses, such as low productivity or inflexible labour markets, further add to the risk. More recently, globalisation, fragile supply chains, and climate-related disruptions have also been identified as triggers. 

3. What is One Consequence of Stagflation? 

One major consequence is the squeeze on households and businesses: consumers face higher costs while wages lag, and companies see rising input costs but falling demand, leading to job cuts and weaker investment. 

4. How do Economist Define Stagflation? 

Economists typically define stagflation as a period where high inflation coexists with stagnant or contracting growth and elevated unemployment. This breaks the conventional trade-off described by the Phillips Curve, which suggests that inflation and unemployment usually move in opposite directions.  

Instead, stagflation shows both rising together, creating what many economists describe as a “policy trap.” Traditional tools to fight inflation, such as raising interest rates, can worsen unemployment, while tools to boost growth, such as stimulus, can push inflation higher. This is why stagflation is seen as one of the most difficult economic challenges to resolve. 

5. Is Stagflation a Risk in 2025? 

Yes, some economists warn that stagflation risks have resurfaced in 2025. Inflation in many economies has stayed higher than expected despite slowing growth, while labour markets are showing early signs of weakness.  

Trade frictions, tariffs, and geopolitical tensions are adding further pressure on supply chains. However, unlike the 1970s, today’s economies have more diversified energy sources and central banks with stronger policy tools, which may help reduce the severity of stagflation if it does occur. 

RISK WARNING: CFDs are complex financial instruments and carry a high risk of losing money rapidly due to leverage. You should ensure you fully understand the risks involved and carefully consider whether you can afford to take the high risk of losing your money before trading.     

Disclaimer: The information is provided for educational purposes only and doesn’t take into account your personal objectives, financial circumstances, or needs. It does not constitute investment advice. We encourage you to seek independent advice if necessary. The information has not been prepared in accordance with legal requirements designed to promote the independence of investment research. No representation or warranty is given as to the accuracy or completeness of any information contained within. This material may contain historical or past performance figures and should not be relied on. Furthermore estimates, forward-looking statements, and forecasts cannot be guaranteed. The information on this site and the products and services offered are not intended for distribution to any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.