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Stagflation refers to an unusual confluence of conditions, where the economy seems to stagnate (showing high unemployment and slow growth) even as inflation continues to grow. Hence the combined term: stagflation.
Stagflation creates potentially negative conditions where people experience a decline in purchasing power in the face of rising prices — and policymakers can’t rely on standard tools (e.g., raising or lowering interest rates) for fear of making things worse.
The word stagflation emerged during the economic crisis and oil price shocks of the 1970s. While there have been hints of stagflation in the last couple of years, with a weaker job market and rising inflation, in addition to geopolitical turmoil in the Mideast, so far the U.S. has avoided outright stagflation, although fears persist.
Key Points
• Stagflation is a rare economic condition characterized by the simultaneous occurrence of slow economic growth, high unemployment, and rising inflation.
• The term, coined in the 1960s, took hold during the 1970s when the U.S. faced a severe economic crisis marked by the oil shock and a wage-price spiral.
• Unlike typical economic downturns, where policymakers can adjust interest rates to stimulate growth, stagflation leaves officials with limited options.
• While fears of stagflation have surfaced owing to recent conditions, the U.S. economy has avoided a recurrence as of mid-2026.
• Investors can be impacted by stagflation through reduced market returns and increased volatility, but they may find opportunities to adjust their portfolios for better stability during these challenging economic periods.
What Is Stagflation?
Stagflation is a term used to describe an unusual circumstance where the economy is slowing, and facing strong headwinds in the form of unemployment, high interest rates, and other factors (stagnation), even as prices continue to rise (inflation).
The coinage was attributed to British Conservative Party politician Iain Macleod in a 1965 speech to Parliament. At the time, the U.K. was in the midst of simultaneous high inflation and unemployment.
In his speech, Macleod said, “We now have the worst of both worlds — not just inflation on the one side or stagnation on the other, but both of them together. We have a sort of ‘stagflation’ situation and history in modern terms is indeed being made.”
The Meaning of Stagflation in Economics
As with many economic concepts, there is no standard definition of stagflation. Generally, though, it describes extreme economic conditions where policymakers are caught between two competing priorities: needing to spur economic growth but also needing to control inflation.
Usually, economists and analysts will use the unemployment rate as a proxy for economic activity when discussing stagflation. So, a period of stagflation is when unemployment rises while inflation — as measured by the consumer price index (CPI) — accelerates above normally acceptable levels of price growth, increasing the risk of a recession.
This is important for investors to understand, whether investing online or through other channels, because although stagflation is a rare occurrence it can impact markets. In the face of inflation, consumers typically consume less — a pattern that’s exacerbated when unemployment is high.
This can impact stocks in various sectors, something that investors interested in buying stocks need to consider if stagflationary conditions arise.
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Stagflation vs Inflation
Inflation is a general increase in the average prices of goods and services. In contrast, stagflation is a combination of stagnant economic growth and rising inflation.
Low but steady levels of inflation are healthy for an economy; there’s a reason why movie theater tickets cost more today than they did in the 1950s. Policymakers within the Federal Reserve like inflation to rise about 2% each year. Inflation doesn’t become a problem until it pushes above that 2% mark, when prices begin to spiral upwards.
You can have inflation without stagflation, but you can’t have stagflation without inflation.
Has Stagflation Ever Happened?
Before the 1960s, when the term was first introduced in the U.K., economists didn’t think a period of rising unemployment and inflation was possible. Generally speaking, inflation would decrease when unemployment increased because workers have less bargaining power to get higher wages, and less spending power.
However, stagflation did occur in the United States in the mid-1970s. During the 1973-1975 recession, the U.S. experienced five quarters where the gross domestic product (GDP) decreased. Inflation peaked at 12.2% in November 1974, and the unemployment rate rose to 9.0% in May 1975.
Historical Examples of Stagflation
This stagflation cycle was part of a larger sequence of events called the Nixon Shock.
Responding to increasing inflation in 1971, President Richard Nixon ended the dollar’s convertibility to gold (and the Bretton Woods system); he also imposed wage and price controls and surcharges on imports. This created a perfect-storm so that when the 1973 oil crisis hit, those surcharges on imports made prices at the gas pump — and across many U.S. industries — skyrocket to then-record prices.
The rising prices helped lead to a wage-price spiral, where inflation led to workers asking for higher wages, which led to more inflation, and so on.
The Federal Reserve raised interest rates to combat the inflation of the early ’70s, but this only created a recession and high unemployment without tamping down inflation. Thus, a prolonged economic stagnation accompanying inflation occurred — a stagflation situation.
While the economy recovered somewhat in the late 1970s, inflation remained a problem for the rest of the decade and into the early ’80s. Federal Reserve chairman Paul Volcker eventually hiked interest rates to 20% by 1981, to get inflation under control.
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Will Stagflation Happen Again?
There are debates about whether stagflation will or could occur again in the United States. There’s always a chance, but the circumstances need to be just right for it to happen.
For example, the economy was in a precarious situation in early 2022, with inflation running high after fallout from the Covid-19 pandemic, and the Federal Reserve raising interest rates at a historic pace to combat it. The Fed was trying to curb inflation with the hope of a soft landing, in which an economy slows enough that prices stop rising quickly but not so slowly that it sparks a recession.
Unfortunately, that strategy saw modest success, but inflation continued to rise.
Current Economic Indicators to Watch
As of June 2026, inflation had reached a three-year high of 4.2%, largely owing to tensions in the Mideast which have caused oil and gas prices to spike. That said, the economy has not slipped into a recession. And now that global relations are cooling down, fuel prices may follow. So, it appears that stagflation has been avoided, as of Q2 2026.
While no one can predict the future, it stands to reason that events that have happened in the past could happen again. Stagflation may yet occur, but investors have the lessons of the 1970s and today’s forecasts to help them prepare.
How Can Stagflation Impact Investors?
Economic stagnation can have several impacts on investors. First, it can lead to lower returns on investment as companies are less likely to grow and expand in a stagnant economy. This can also push investors to become more risk-averse as they seek out investments that are more likely to provide stability and income.
Secondly, stagnation typically includes higher levels of unemployment, which can fuel negative consumer sentiment. This can make it more difficult for companies to prosper and lead to investors losing confidence in the economy.
How to Protect Your Portfolio During Stagflation
A period of stagflation does not necessarily mean excessive strain on your portfolio. For some investors, there are, perhaps surprisingly, compelling strategies to consider when the market is down. Volatility may allow investors to buy low and then make appreciable gains as the market corrects itself.
Recommended: How to Invest During Inflation
The Takeaway
Stagflation occurs when an economy experiences simultaneous high inflation and high unemployment. It’s a situation that often leads to decreased spending by consumers and businesses, which can further stall economic growth and investment returns.
Stagflation has occurred before in the U.S. — notably during the Nixon Shock of the early 1970s — and there is no reason to think it couldn’t happen again at some point. By understanding stagflationary conditions, investors can think ahead and prepare themselves.
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FAQ
What is the main cause of stagflation?
Stagflation is principally caused by high inflation, high unemployment, and often other economic factors, such as oil prices or interest rate changes.
How does stagflation affect the stock market?
Stagflation puts a damper on certain stock market sectors, owing to the decrease in consumer confidence, and lower demand for goods and services.
What assets perform well during stagflation?
It depends on overall market conditions, and which factors are fueling the stagflationary conditions, but in general portfolio diversification can have a protective effect. It’s difficult to predict which assets will do well during stagflation, as conditions vary.
Is stagflation worse than a recession?
Some economists argue that a period of stagflation might be considered worse than a recession, because the factors that contribute to stagflation are paradoxical and difficult to solve for — which may cause stagflationary conditions to persist.
How long does stagflation typically last?
It’s difficult to say because there has only been one stagflationary period in the U.S., which lasted for about a decade, from the early 1970s until the early 1980s, owing to a confluence of domestic and global conditions that included a collapse of the global monetary system under the Bretton Woods agreement, the wars in Southeast Asia, and oil shocks.
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