Stagflation represents one of the most challenging economic conditions, marked by the simultaneous occurrence of high inflation, stagnant or slow economic growth, and rising unemployment.

This rare and paradoxical phenomenon disrupts conventional economic relationships where inflation normally correlates with growth and low unemployment.

Defining Stagflation

Stagflation combines the concepts of "stagnation" is a period of little or no economic growth with "inflation," characterized by rising prices for goods and services. Unlike typical economic cycles where inflation declines during recessions, stagflation merges rising prices with economic contraction and elevated joblessness, creating a scenario of economic hardship for consumers and businesses alike.

Key Causes of Stagflation Today

Several specific and interrelated factors drive stagflation in contemporary contexts:

Supply Shocks: Sudden disruptions or increases in the cost of essential commodities, especially energy such as oil, significantly raise production expenses across industries.

Monetary and Fiscal Policy Missteps: Periods of loose monetary policy, characterized by sustained low interest rates and expansive money supply, can unintentionally catalyze inflation. When such inflation occurs alongside weak growth and job losses, stagflation can emerge.

Labor Market and Productivity Issues: Disruptions from recent pandemics and structural economic changes, including labor shortages and declining productivity growth, reduce economic expansion capacity, contributing to both stagnation and inflationary stress.

Trade Policies and Tariffs: The imposition of tariffs, notably in 2025's trade environment, drives up costs for goods. These costs are often passed on to consumers while dampening demand, further slowing economic growth and pushing inflation upward.

Economic and Social Impacts

Stagflation exacerbates economic uncertainty and hardship by tightening consumer spending power through rising prices while simultaneously constraining job opportunities. The combination of stagnant wages and higher living costs erodes household welfare, increases corporate caution in investment and hiring, and instigates pervasive economic malaise. It also raises the "misery index," which sums inflation and unemployment rates, highlighting worsening public economic distress.

Policy Challenges

The chief difficulty in addressing stagflation lies in the opposing effects of conventional economic tools. Tightening monetary policy to control inflation typically depresses growth and heightens unemployment, while policies aimed at stimulating growth tend to worsen inflation.

As Milton Friedman, Nobel laureate economist, emphasized, "Inflation is always and everywhere a monetary phenomenon," underscoring the need for prudent monetary management alongside structural measures. According to economist Larry Summers, tackling stagflation demands careful calibration because actions that tame prices can burden employment and output; persistent supply shocks heighten these risks.

Stagflation today embodies a complex economic paradox involving the coexistence of inflation, economic stagnation, and rising unemployment. Fuelled by supply shocks, policy misalignments, labor market shifts, and trade disruptions, it imposes significant difficulties on economic stability and growth. The unique challenge it presents demands careful policy calibration to mitigate its impacts without triggering further economic instability.