Stagflation is an economic condition characterized by a combination of stagnant economic growth, high unemployment, and high inflation. This phenomenon poses a challenge for policymakers, as the measures typically used to combat inflation (like raising interest rates) can exacerbate unemployment and hinder economic growth, while strategies to reduce unemployment (such as increasing government spending) can lead to higher inflation.
The term gained prominence during the 1970s when many economies, particularly in the West, experienced stagnant growth alongside rising prices, largely due to oil crises and other supply shocks. Stagflation presents a unique dilemma, as the usual tools of economic policy may not effectively address the simultaneous occurrence of the three undesirable economic conditions.
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