What Is Stagflation?

Stagflation meaning

Stagflation is stagnation and inflation at the same time: output flat or falling, unemployment rising, and prices still climbing fast. Hansard records the British MP Iain Macleod using the word in the House of Commons on 17 November 1965, when he said Britain now had inflation and stagnation, "both of them together". "We have a sort of 'stagflation' situation," he said.

The combination is unusual because the two halves normally pull in opposite directions. In an ordinary downturn, spending falls, businesses lose pricing power and inflation slows. In stagflation, prices keep rising while the economy weakens, usually because costs have been pushed up from the supply side or because people expect inflation to continue and set wages and prices accordingly.

That is what makes it hard to fight. The Federal Reserve's own history of the period states the dilemma: fighting high unemployment would almost certainly drive inflation higher, while fighting inflation would just as certainly push unemployment higher still.

The 1970s stagflation in figures

The Federal Reserve dates the Great Inflation from 1965 to 1982. Within it, two bouts fit the stagflation label most closely: 1973 to 1975 and 1979 to 1982.

The first shock. On 19 October 1973, Arab oil producers imposed an embargo on the United States. By January 1974 oil had gone from $2.90 a barrel to $11.65. A recession followed, which the National Bureau of Economic Research dates from November 1973 to March 1975. Real GDP fell in 1974 and again in 1975. The CPI was 12.3 percent higher in December 1974 than a year earlier, and unemployment roughly doubled, from 4.6 percent in October 1973 to 9.0 percent in May 1975.

The second shock. The Iranian revolution in 1979 tripled the cost of oil, according to the Fed's history. When Paul Volcker became Fed chair in August 1979, inflation was running above 11 percent and unemployment was just under 6 percent. The 12-month CPI rate peaked at 14.8 percent in March 1980. The Fed tightened hard: the effective federal funds rate averaged 19.1 percent in June 1981. The economy went through two recessions, January to July 1980 and July 1981 to November 1982, and unemployment reached 10.8 percent in November and December 1982. By 1983 CPI inflation was down to 3.2 percent.

Over the whole Great Inflation the dollar's purchasing power fell by about two-thirds: the CPI's 1982 annual average was 3.06 times its 1965 level. Year-by-year rates for the period are in the US inflation rate by year table.

What causes stagflation

Economists usually point to two ingredients, and the 1970s had both.

A supply shock

A sudden rise in the cost of something the whole economy uses, oil above all, raises prices and cuts output at the same time. Households pay more for fuel and have less to spend on everything else; businesses face higher costs and produce less. The Fed's history describes the 1970s energy crises as having "increased oil costs and sapped U.S. growth".

Loose money and unanchored expectations

A one-off price jump does not by itself produce a decade of inflation. The Fed's own account centres on policy. Through the 1960s and 1970s policymakers believed lower unemployment could be bought permanently with modestly higher inflation. As households and businesses came to anticipate rising prices, that trade-off worsened until both inflation and unemployment were unacceptably high.

The monetary anchor went too. On 15 August 1971 President Nixon closed the gold window, ending foreign governments' right to exchange dollars for gold, and imposed a 90-day freeze on wages and prices. The Fed's history describes the result as an international monetary system that "turned into a fiat one". With the gold link gone, restraint on the dollar rested with the Fed alone, and the decisive tightening came only after Volcker arrived in 1979.

The broader mechanics of demand-pull, cost-push and money-driven inflation are covered in what causes inflation.

Stagflation vs recession

A recession is a fall in activity. The NBER, which dates US business cycles, defines it as a significant decline in economic activity that is spread across the economy and lasts more than a few months. Inflation is not part of the definition.

The difference shows in what happens to prices:

• Ordinary recession. Demand falls and inflation usually falls with it. In 2009 unemployment averaged 9.3 percent and the CPI's annual average fell 0.4 percent, the only calendar-year decline since 1955. That is the opposite problem, covered in deflation vs inflation.
• Stagflation. Prices keep rising through the slump. In 1974 the economy shrank while the CPI rose 11.0 percent.

The label is also used more loosely for stretches of high inflation and high unemployment between recessions. In 1979 real GDP still grew 3.2 percent, yet inflation was 11.3 percent and unemployment averaged 5.9 percent. The common thread is the policy bind: rate cuts that would help jobs risk feeding inflation, and rate rises that would slow inflation risk deepening the slump.

Is the US in stagflation now?

The inflation half of the word shows in the data published through October 2026. The growth half does not, so far.

Prices. CPI inflation rose to 3.7 percent in the 12 months to September 2026, from 2.4 percent in January. Energy did most of it: the energy index was up 20.4 percent on the year and gasoline 34.2 percent. In its July statement the Federal Open Market Committee said elevated inflation partly reflected supply shocks, including in energy, and cited uncertainty from the conflict in the Middle East. The minutes of its September meeting record officials saying geopolitical developments had pushed up prices for crude oil and refined fuel.

Growth and jobs. Real GDP grew at a 2.5 percent annual rate in the first quarter of 2026 and 2.2 percent in the second, after 0.2 percent in the fourth quarter of 2025. Unemployment was 4.2 percent in September 2026, against 4.4 percent a year earlier. In September the Fed's median projection was 2.3 percent growth for 2026, with unemployment at 4.1 percent in the fourth quarter.

The difference from 1974. Core CPI, which excludes food and energy, was 11.3 percent in December 1974, so the inflation of that era ran through the whole economy. In September 2026 core was 2.6 percent. The pressure so far is concentrated in fuel. In the 1970s it spread through the whole basket as households and businesses came to expect rising prices.

The Fed's reading. On 16 September 2026 the FOMC raised its target range by a quarter point to 3.75 to 4 percent, its first increase since July 2023, and said inflation remained elevated while economic activity was expanding at a solid pace. Its median projection has PCE inflation at 3.7 percent for 2026 and falling to 2.3 percent in 2027; the Fed staff expect inflation to reach 2 percent in 2029.

The next tests are close. The Bureau of Economic Analysis publishes its first estimate of third-quarter GDP on 29 October 2026, and BLS publishes October CPI on 10 November. The signals to watch are core inflation rising toward headline, and growth or employment weakening while energy prices stay high.

Why stagflation is hard on savers

Stagflation erodes purchasing power while weakening the incomes and asset values that might offset it. Fixed payments from cash and bonds buy less each year, and a slowing economy weighs on profits.

In the 1970s the interest rate on short-term money often failed to keep up. The effective federal funds rate averaged 10.5 percent in 1974 against inflation of 11.0 percent, and 5.8 percent in 1975 against 9.1 percent. Across 1974 to 1980 it averaged below CPI inflation in six of the seven years. A saver earning that rate lost ground in real terms for most of the decade, until the policy rate averaged 16.4 percent in 1981 against inflation of 10.3 percent.

The test for any return is what it buys after inflation. The inflation-adjusted return calculator converts a nominal return into a real one using the CPI.