Stagflation: basics

In short: Stagflation describes the unusual combination of economic stagnation and high inflation occurring at the same time. It poses a dilemma for central banks, since classic tools against inflation can worsen stagnation.

In more detail: Normally, high inflation goes along with strong growth, while stagnation usually means low inflation.

In detail

• Causes: Supply shocks such as sudden oil price spikes can simultaneously drive up prices and make production more expensive.
• Historical example: The oil crisis of the 1970s triggered classic stagflation in many Western countries.
• Central bank dilemma: Raising interest rates against inflation can further slow an already weak economy.
• Labour market effects: Stagflation often causes rising unemployment despite simultaneously rising prices.
• Phillips curve: The classic model linking inflation and unemployment inversely breaks down during stagflation.
• Monetary policy responses: Some central banks temporarily accept higher inflation to support growth.
• Current relevance: Supply chain problems and energy price shocks have recently reawakened stagflation concerns (konjunktur-und-arbeitslosigkeit, zentralbank-und-leitzins).