Stagflation is an economic condition characterized by the simultaneous occurrence of high inflation, slow or negative economic growth (stagnation), and elevated unemployment. The term combines “stagnation” and “inflation” and was coined in the 1960s to describe a phenomenon that most prevailing economic models at the time held to be nearly impossible under standard assumptions. Because conventional Keynesian demand management theory predicted a trade-off between inflation and unemployment - captured in the Phillips curve - stagflation presented a significant empirical and theoretical challenge to mainstream macroeconomics.

Standard macroeconomic theory, as it developed through the mid-twentieth century, treated inflation and unemployment as inversely related: policymakers could accept higher inflation to reduce unemployment, or tolerate higher unemployment to bring inflation down. Stagflation breaks this assumed relationship. Economists associated with the monetarist school, particularly Milton Friedman and Edmund Phelps, had independently warned before the 1970s that the Phillips curve trade-off was not stable in the long run, and that expectations of inflation would shift the curve. Their predictions were borne out by events, and the episode substantially reshaped economic theory.

The most widely studied instance of stagflation occurred in the United States and other Western economies during the 1970s, driven by a combination of supply-side shocks (particularly the 1973 OPEC oil embargo and the 1979 oil crisis), expansionary monetary policy in the preceding years, and structural factors including wage-price spirals and declining productivity growth. For a detailed account, see Stagflation - History.

Economists identify several mechanisms that can produce stagflation:

• Supply shocks - Sudden increases in the cost of key inputs (energy, raw materials) raise production costs across the economy, pushing prices up while simultaneously reducing output and employment.
• Monetary expansion followed by supply constraint - Prior monetary stimulus can leave excess money in circulation; when supply is then constrained, inflation rises even as growth falters.
• Wage-price spirals - In economies with strong wage indexation or union bargaining power, rising prices feed into wage demands, which feed back into prices, independent of demand conditions.
• Supply-side structural decline - Falling productivity growth reduces the economy's capacity to expand without inflationary pressure.

The relative weight of these factors is a matter of ongoing debate. See Stagflation - Causes Debate.

Stagflation poses a dilemma for conventional stabilization policy: tools used to fight inflation (tightening monetary policy, reducing government spending) tend to worsen unemployment and slow growth, while tools used to stimulate growth tend to worsen inflation. The U.S. Federal Reserve under Paul Volcker broke the 1970s stagflation through a sharp and sustained increase in interest rates beginning in 1979, which produced a severe recession before inflation fell. The costs and tradeoffs of that approach, and whether alternative policies could have achieved similar results, are addressed in Stagflation - Debate.

There is broad consensus among economists that the original Phillips curve formulation was incomplete, and that inflation expectations play a central role in the relationship between inflation and unemployment. There is substantial agreement that the 1970s stagflation in the United States was driven in significant part by supply shocks and prior monetary expansion. Disagreement persists on the optimal policy response to stagflation, the relative contributions of various causes, and whether stagflation-like conditions can recur in modern monetary regimes. See Stagflation - Economics Consensus.

• Monetarist view - Stagflation resulted primarily from excessive money supply growth in the preceding years; supply shocks exposed and amplified an already inflationary monetary environment. Tight monetary policy is the appropriate long-term remedy. See Stagflation - Monetarist Viewpoint-viewpoint.
• Post-Keynesian / structural view - Supply shocks, corporate pricing power, and structural features of labor markets were primary drivers; monetary tightening addressed symptoms at high social cost without resolving underlying vulnerabilities. See Stagflation - Post-Keynesian Viewpoint-viewpoint.
• Supply-side view - Stagflation reflected the consequences of excessive regulation, high marginal tax rates, and government interference in markets that suppressed productive capacity; the remedy is structural reform to expand supply. See Stagflation - Supply-Side Viewpoint-viewpoint.
• Austrian / sound money view - Stagflation is an inherent risk of fiat monetary systems and central banking; the episode confirmed that central banks cannot reliably manage the economy without generating distortions. See Stagflation - Austrian Viewpoint-viewpoint.

• Stagflation - History
• Stagflation - Debate
• Stagflation - Causes Debate
• Stagflation - Economics Consensus
• Inflation
• Phillips Curve
• Monetary Policy
• 1970s Oil Crisis
• Volcker Shock

1. Samuelson, Paul A., and Robert M. Solow. “Analytical Aspects of Anti-Inflation Policy.” American Economic Review 50, no. 2 (1960): 177-194. (Application of the Phillips curve framework to the U.S. context.)
2. Friedman, Milton. “The Role of Monetary Policy.” American Economic Review 58, no. 1 (1968): 1-17. (Prediction of Phillips curve instability.)
3. Phelps, Edmund S. “Phillips Curves, Expectations of Inflation and Optimal Unemployment over Time.” Economica 34, no. 135 (1967): 254-281.
4. Blinder, Alan S., and Jeremy B. Rudd. “The Supply-Shock Explanation of the Great Stagflation Revisited.” In The Great Inflation: The Rebirth of Modern Central Banking, edited by Michael D. Bordo and Athanasios Orphanides. University of Chicago Press, 2013.
5. Meltzer, Allan H. A History of the Federal Reserve, Volume 2. University of Chicago Press, 2009. (Covers the 1970s monetary environment and Volcker disinflation.)