Stagflation, a combination of the words stagnation and inflation, is when a country’s economy exhibits high inflation and slow or negative growth, plus high unemployment rates.
Some economists were worried that we’d enter a period of stagflation in mid-2022, when the Consumer Price Index, which measures inflation, rose at a whopping 9.1%. However, economic growth continued, and the Federal Reserve aggressively raised interest rates over the 2022-23 period to tame inflation, which has fallen dramatically since then without the economy experiencing stagflation.
During stagflation, prices will continue rising but jobs will be harder to find. Wages may not keep pace with inflation, which will, in turn, lead to halted economic growth. People and businesses, alike, may feel insecure about spending money.
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What Causes Stagflation?
Due to supply and demand, reduced sales lead to lower prices or at least less inflation. But, during stagflation, other factors will keep prices rising in spite of a lack of spending.
Stagflation is a relatively rare occurrence because it consists of seemingly opposing economic circumstances. Generally speaking, higher wages and economic growth can bring about inflation, while a slowing economy brings inflation rates down. But certain factors can make conditions ripe for that unsavory blend of high inflation and a shrinking economy.
Poor monetary policy has been a factor in the past, most notably in the U.S. in the 1970s. Supply shocks, such as a sudden lack of access to essential commodities like oil, can spike prices while simultaneously reducing economic activity.
What Does Stagflation Mean for the U.S.?
If the U.S. enters a period of stagflation, prices will continue rising even as companies attempt to cut costs through layoffs or pay cuts. With interest rates still high, it may be harder to borrow the money you might need to make ends meet if you lose your job. And any emergency savings you’ve tucked away won’t have as much buying power in the face of inflation.
Factors apart from consumer and business spending can impact inflation. Some include:
High oil prices
Low-interest rates
Trade sanctions and tariffs
Current Events Affecting Inflation in the U.S.
As of April 2025, inflation is the lowest is has been since 2021. However, Moody’s Analytics found that the top 10% of households are responsible for almost half of consumer spending. This shows that many American household don’t have a lot of extra money to spend. The first quarter of 2025 saw a decrease in goods and services produced in the United States, a key recession indicator.
The Trump administration’s tariff policy has also created a lot of uncertainty about the future costs of global imports.
What To Do During Stagflation
In addition to looking at your budget to see where you can cut costs, you should continue investing during stagflation if you can. Investments like 401(k)s, IRAs and stocks are likely to fall, so it’s best not to cash them out — or even look at them if it causes emotional stress.
Here are some investments to consider:
Value stocks: These can grow once stagflation ends.
Precious metals: Tend to hold their value.
Commodities: Rise as the price of consumer goods go up.
Commodity ETFs: These investments track the prices of similar commodities in one fund.
Keep in mind that stocks, ETFs, commodities and even precious metals can be volatile. Any investment carries risk, so you will want to invest in line with your risk tolerance.
Stagflation is also harder to fight since it’s so unpredictable. Increasing interest rates to slow inflation can compound job loss and slow economic growth to undesirable levels. Experts agree it’s generally easier to avoid stagflation than to stop it once it starts.
Is Stagflation Worse Than Recession?
During a recession, a country’s economy has slow growth, coupled with high unemployment. But these factors tend to reduce inflation since spending also slows as a reaction to consumer fear. When prices remain elevated due to other factors, stagflation occurs.
Stagflation may be worse than a recession for many people. At a time when people are losing jobs, prices remain elevated. This can lead to food insecurity, foreclosures or homelessness. Financial struggles will impact almost everyone except for the wealthiest people in a society.
FAQ
What Happens During Stagflation?
Stagflation is a combination of the words “stagnation” and “inflation,” and those terms explain what happens during stagflation. The “stagnation” part of the word means that economic growth has stalled or even fallen. The “inflation” part refers to how even in the midst of a slowing or shrinking economy, prices continue to rise. In real-world terms, this means that consumers must pay higher prices while businesses may be laying off workers, freezing hiring or even cutting wages.
When Was the Last Time the US Had Stagflation?
The only two recorded times that the U.S. has had actual stagflation were from 1974 to 1975 and between 1978 and 1982. According to Fortune, these periods of stagflation occurred during a period known as The Great Inflation from 1965 to 1982.
What Is the Difference Between Inflation and Stagflation?
Inflation refers to the rising prices that occur during stagflation but don’t tell the whole story. The other portion of stagflation, “stagnation,” refers to stalled or falling economic activity. The combination of the two — rising prices accompanied by the lack of economic growth — defines stagflation.
John Csiszar contributed to the reporting of this article.
This article originally appeared on GOBankingRates.com: What Is Stagflation and How Does It Affect You?
