Stagflation is an economic concept that describes the rare and challenging combination of three simultaneous conditions: high inflation, stagnant economic growth (or recession), and elevated unemployment. The term itself is a portmanteau of "stagnation" and "inflation".
The concept's origin is attributed to British politician Iain Macleod, who used the word in a 1965 speech to the Parliament to describe the economic distress in the United Kingdom. Stagflation gained broader recognition in the 1970s after a series of global economic shocks, most notably the 1973 oil crisis, which caused prices to skyrocket and growth to slow. This phenomenon challenged traditional economic theories, particularly the Phillips Curve, which posited an inverse relationship between inflation and unemployment.
Stagflation works primarily through a mechanism known as a supply shock or through misguided government policies. A supply shock, such as a sudden, sharp increase in the price of a key commodity like oil, raises production costs for nearly all businesses. Companies then pass these higher costs to consumers as rising prices (inflation) while simultaneously cutting back on production and hiring due to lower profitability, leading to slower growth and higher unemployment (stagnation).
The concept connects directly to the Phillips Curve and the policy dilemma it creates: measures to curb inflation, like raising interest rates, can worsen unemployment, while policies to reduce unemployment may fuel inflation. The stagflation of the 1970s led to a reevaluation of Keynesian economic policies and contributed to the rise of alternative theories like monetarism.
While the most severe episode was in the 1970s, fears of stagflation have recently resurfaced, particularly in 2026, due to geopolitical conflicts causing new supply shocks, such as volatility in oil prices. The core definition of stagflation—high inflation, low growth, and high unemployment—has not changed, but the specific triggers, like the 1973 OPEC oil embargo versus recent geopolitical events, are different.