Stagflation

Stagflation is particularly difficult for policymakers because the usual remedies for its two problems conflict. Raising interest rates can bring down inflation but may worsen unemployment and slow growth further. Cutting interest rates or increasing spending can support growth and jobs but may push inflation even higher.

The term became widely used in the 1970s, when many developed economies suffered from it. Sharp increases in oil prices raised costs throughout the economy, pushing up prices while also reducing output and employment.

Stagflation is often caused by supply shocks, events that suddenly reduce an economy's ability to produce goods and services or sharply raise production costs, such as energy price spikes, disruptions to supply chains or poor harvests. It can also arise when inflation expectations become entrenched, so that workers and businesses keep pushing up wages and prices even as the economy weakens.

Investors find stagflation challenging because it can hurt both shares, through weaker profits, and bonds, through rising inflation and interest rates.