In a period of stagflation, when prices may be rising, you need more disposable income to cover rising prices. If you don’t have loans and credit card balances to pay monthly, then a 10% increase in food prices may be uncomfortable but still manageable. However, if you carry so much debt that your income is covering your month-to-month expenses and debt interest payments, , then a 10% increase in food prices could be really challenging. Government can use education and training of workers to increase their productivity. This can be time taking yet, output of the firms will increase leading to the increase in real GDP of the country along with fall in the general price level.

• Simultaneously, these increased costs can reduce economic output and employment, causing stagnation.
• A long-lasting surge in prices has been quite rare in modern history and until this year, the inflation rate hadn’t been above 5% for 6 months or more since the 1980s.
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• Economist Larry Summers, a former Treasury Secretary, argued in a March 2022 op-ed in The Washington Post that the Federal Reserve’s current policy trajectory would likely lead to stagflation and ultimately a major recession.

Inflation Explained

They can also lower interest rates to contribute to greater economic growth. This approach has limited in that monetary policy is unable to address a simultaneous recession and inflationary issues. A substantial shortage or rise in demand of an essential good could spur high inflation as well as an economic downturn. For example, the 1973 oil crisis saw the price of oil rise dramatically in the US after an embargo, setting off a period of stagflation.

The Federal Reserve is tasked with keeping prices stable and unemployment low. This becomes particularly difficult when the primary tool for combatting the first exacerbates the second. This destructive combination can put households and businesses in a tight spot as incomes fail to rise as fast as prices increase, he says.

Current Risk of Stagflation

Described as a potential “flattening” or “nonlinear” Phillips curve, this could make it even more difficult for policymakers to address stagflation. This economic framework led policymakers to focus primarily on managing the tradeoff between these variables (inflation and unemployment). When stagflation struck major economies worldwide in the 1970s, it upended not just the lives of many affected but the conventional economic wisdom, forcing a generation-long rethinking of macroeconomic theory and policy. Stagflation is an economic nightmare, both for those who live through it and the policymakers called on to solve it. This rare economic condition defies the conventional economics that links inflation with economic booms and falling prices with recessions.

Because economists didn’t think increasing interest rates and unemployment could happen at the same time, there weren’t policies to address such potential outcomes. Later on, at the time of the oil crisis, the price of oil increased threefold in the 1970s and stagflation resulted. The U.S. experienced a recession, with five quarters in which GDP growth was negative. In 1973, the rate of inflation doubled; by 1975, the rate of unemployment reached 9 percent. The 2025 Trump tariffs have revived concerns about this economic phenomenon in a way not seen since the 1970s, with Federal Reserve officials warning about higher inflation alongside slower growth.

Stagflation: Economic Implications

The level of inflation isn’t defined either, but we can assume that it has to be at least above the 2% threshold set by most central banks in advanced economies. Likewise, Congressional approval of an expansionary fiscal policy included high deficit spending and a major economic stimulus package. Combined with economic growth of just 1 to 2 percent, this situation raised fears of stagflation, which could occur if the economy continued to stagnate as inflation persisted. 2011 saw the public afraid of the possibility of a new, economically disastrous period of stagflation.

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If having three to six months’ worth of expenses sounds like an overwhelming goal, start small. After reaching this amount, you can work on saving a month’s worth of expenses. Keep adding to your savings account over time, and eventually, you’ll reach the recommended safety net. This isn’t just an extremely uncomfortable environment to live in— it’s also quite tricky for governments to fix.

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The rising prices have a knock-on effect, meaning the cost of other goods and services goes up while outputs may fall. Supply issues begin to occur, and the economy in general doesn’t function or perform as well as it once did. Supply shocks can also be caused by labor restrictions which reduce output and raise unemployment and wages while causing prices to rise as businesses push the higher costs of labor onto consumers.

Supply theory

If you’re looking for further protection, you could look into investments that tend to do well during periods of inflation. For instance, Treasury Inflation-Protected Securities (TIPS) and I bonds both pay more interest when inflation rises. Stocks related to commodities, such as energy, industrial metals, precious metals, and agriculture products, have historically done well in inflationary environments. As always, ensure any new investments fit within your overall investing strategy. Although there’s debate around the best ways to handle stagflation, the stagflation in the US in the 1970s and 1980s was addressed with large interest rate hikes from the Fed. Other options to help fix inflation include changing supply-side policies in hopes to incentivize growth and reduce costs to critical resources.

• When both slow growth and high inflation are present, officials are left to decide which factor is more problematic.
• Currently, financial markets see Fed officials as likely to give more consideration to the issue of growth.
• But if stagflation is at play, deflation alone may not spur fast recovery because slow growth and unemployment issues must also be addressed.
• Apollo estimates that unemployment could rise from 4.2% currently to 4.4% in 2025 and tick up to 5% or higher in 2026.
• Companies faced with higher costs had to either reduce output (leading to layoffs) or raise prices (feeding inflation), and many did both.

Central banks must balance controlling inflation with supporting economic growth, making traditional recession-fighting tools less effective. The very forces causing this suffering cripple a nation’s ability to compete globally. Businesses face higher operational costs, making their exports uncompetitive internationally. Simultaneously, the currency of a stagflation-stricken economy inherently loses value against other countries, as inflation erodes its intrinsic worth and the lack of growth offers little incentive for foreign investment.

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This paper develops a probabilistic framework to estimate the likelihood of stagflation versus soft landing scenarios over a four-quarter horizon. Building on Bekaert, Engstrom, and Ermolov (2025), the model integrates survey forecasts, structural shock decomposition, and a non-Gaussian BEGE-GARCH approach to capture time-varying volatility and skewness. Results suggest that the probability of stagflation was elevated at around 30 percent in late 2022, while the chance of a soft landing was below 5 percent.

This reduced spending erodes businesses’ bottom lines and can reduce hiring, thus unemployment rises. So when stagflation looms, the Fed is caught juggling a double-edged sword. Stagnant economic growth is a bit harder to comprehend as it can be less immediately apparent. Stagnation is often defined as a period in which gross domestic product (GDP) is either growing very slowly or declining, says Frank Brochin, chief investment officer of Family Office Practice at The Colony Group. Many of us have experienced what living in a stagnant economy is like but will be unfamiliar with stagflation.

Governments should prioritize structural reforms aimed at reducing excessive regulations, increasing labor market flexibility, and encouraging investment in productive sectors. Stagflation is a bad economic situation and goes against the conventional economic theory of the Phillips curve, which assumes a trade-off between inflation and unemployment. A persistent increase in the general price level of goods and services in an economy over a period of time is called inflation. But one measure seems to support the idea that stagflation should not be a top-of-mind concern for investors at the moment. In the 1970s, economist Arthur Okun developed an index to measure stagflation that is calculated by adding the unemployment rate to the annual inflation rate. “That this index is widely referred to as the ‘misery index’ shows how painful stagflation is,” Brochinm says.

Economist Larry Summers, a former Treasury Secretary, argued in a March 2022 op-ed in The Washington Post that the Federal Reserve’s current policy trajectory would likely lead to stagflation and ultimately a major recession. The information herein is provided for educational purposes only and should not be construed as financial or investment advice, nor should any information in this document be relied on when making an investment decision. Opinions and views expressed reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change. Hyperlinks to third-party websites in this presentation are provided for reader convenience only. Unless otherwise noted, information included herein is presented as of the dates indicated. This presentation is not complete and the information contained herein may change at any time without notice.

Stagflation is an economic phenomenon characterised by the simultaneous occurrence of high inflation, stagnating economic growth, and elevated unemployment rates. This rare combination poses significant online forex trading for beginners learn how to trade forex challenges for policymakers and investors alike. Stagflation denotes a situation characterized by stagnant economic growth, high inflation, and unemployment.