Stagflation
The coexistence of high inflation, high unemployment, and slow economic growth.
What is Stagflation?
Stagflation is a rare economic condition combining stagnant economic growth (or recession), high unemployment, and high inflation simultaneously. It is particularly problematic for policymakers because the standard tools to fight inflation (raising interest rates) tend to worsen unemployment and slow growth, while tools to stimulate growth (cutting rates) risk worsening inflation. The term was coined in the 1970s during the OPEC oil embargo period, when supply shocks drove up prices while economic output declined.
Example
In 1974–75, US inflation peaked above 12% while unemployment rose above 9% and GDP contracted — the textbook example of stagflation. The Federal Reserve faced an impossible dilemma of fighting both inflation and recession simultaneously.