Stagflation

Stagflation is an economic condition characterized by the simultaneous occurrence of stagnant economic growth, high unemployment, and high inflation. This phenomenon challenges the traditional economic theory that inflation and unemployment are inversely related, as described by the Phillips Curve. In a stagflation scenario, an economy experiences slow growth or recession alongside rising prices, leading to a decline in purchasing power for consumers. This situation can result from various factors, including supply shocks (such as oil price increases), poor economic policy, and structural weaknesses within an economy. Stagflation poses significant difficulties for policymakers since measures to combat inflation, like raising interest rates, may exacerbate unemployment and slow growth, while efforts to stimulate growth may fuel inflation.