Stagflation

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Stagflation refers to an economic condition characterized by a simultaneous occurrence of high inflation, stagnant economic growth, and elevated unemployment. This phenomenon challenges traditional economic theories, which previously suggested that inflation and unemployment were inversely related, as depicted by the Phillips Curve. The term stagflation, a blend of "stagnation" and "inflation," was popularized by British politician Iain Macleod in the 1960s, during a period of economic distress in the United Kingdom. It gained broader recognition in the 1970s following a series of global economic shocks, particularly the 1973 oil crisis, which significantly disrupted supply chains and contributed to rising prices and slowing growth.

Stagflation presents a policy dilemma, as typical measures to curb inflation—such as tightening monetary policy—can further exacerbate unemployment, while policies aimed at reducing unemployment may fuel inflation. Two main explanations for stagflation are commonly discussed: supply shocks, such as a sharp increase in oil prices, and misguided government policies that simultaneously hinder industrial output and expand the money supply too rapidly. The stagflation of the 1970s led to a reevaluation of Keynesian economic policies and contributed to the rise of alternative economic theories, including monetarism and supply-side economics.