The Basics
- Simple definition: A combination of stagnant economic growth, high unemployment, and high inflation.
- Core idea: The worst of both worlds – no growth, rising prices.
- Think of it as: The economy is sick with fever (inflation) and paralysis (stagnation) simultaneously.
What It Actually Means
Traditional Keynesian theory suggested that inflation and unemployment moved in opposite directions (Phillips curve). Stagflation broke that rule in the 1970s, caused by supply shocks (oil price spikes) that raised costs and reduced output simultaneously. It’s particularly difficult for policymakers because fighting inflation (raising rates) worsens unemployment, while fighting unemployment (stimulus) worsens inflation.
Example
Pakistan has experienced stagflation-like conditions when energy price shocks combine with security issues or political instability – growth slows while inflation accelerates, leaving policymakers with painful trade-offs.
Why It Matters (2026)
Energy price volatility, supply chain disruptions, and geopolitical tensions create stagflation risks. Policymakers must carefully balance responses to avoid worsening one problem while fixing another.
See also
Inflation • Unemployment • Phillips Curve • Supply Shock • Oil Price Shocks
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