Stagflation: What happens when inflation and recession cross paths?
You know, one of the most disturbing phenomena in the economy is stagflation. It's a state where inflation is rising and the economy is slowing down at the same time. Does it sound like a contradiction? Because it is – after all, when we talk about inflation, we usually think about an overheated economy, about growth, about everyone spending, about everything spinning. And recession? It's stagnation, deflation, immobility. And yet... stagflation combines both of these phenomena. And that's why it's so disturbing.
The origin of the concept
The term “stagflation” became popular in the 1970s. It was then, during the oil crisis, that the West was dealt a heavy blow. Oil prices shot up, which caused an increase in production costs, and consumer prices followed suit. And instead of the expected growth, economies began to slow down. The effect? Rising inflation, higher unemployment, and a slowdown in growth. Economists were helpless. Because every action had the opposite effect – you fight inflation, you worsen the situation on the labor market. You want to stimulate employment – you tighten inflation.
How does stagflation happen?
Where does stagflation come from? There may be several reasons.
First, supply shocks. Suddenly, something becomes more expensive – oil, gas, grain – and this affects production costs. Companies have to cut costs, so they produce less, employ fewer people, and prices rise.
Secondly, too loose monetary policy. If the state “pumped” money into the economy, but the supply did not keep up – the result could be inflation without real growth.
Third, the rise in labor costs. If wages rise quickly but productivity does not follow, prices rise, companies suffocate, and a spiral begins: higher wages → higher prices → higher wages again…
And one more thing – if people and companies lose trust in the government or the central bank, they stop investing, postpone decisions, buy in advance. And again: stagnation plus inflation.
Why is it so dangerous?
Exactly – what is the worst thing about all this? That governments are in a bind. Because if the economy is slowing down, then normally interest rates are lowered to stimulate it. But if at the same time inflation is rising, such a policy will only deepen it. And if you try to fight inflation, i.e. raise rates – you will worsen the situation on the labor market and “freeze” growth even more. It is like putting out a fire with gasoline or water – both options can be harmful.
For people this means very specific problems:
– money loses value faster than wages grow – you can’t keep up with your expenses,
– it’s harder to find a job – companies are cutting employment,
– the cost of living is soaring – energy, food, services… everything is getting more expensive, even though the economy is at a standstill.
History knows such cases.
The most famous case of stagflation? The 1970s and the OPEC oil embargo. In the US, inflation reached over 10%, unemployment over 7%. The Fed did not react for a long time, but finally Paul Volcker decided to take drastic steps - sharp increases in interest rates. This led to a deep recession, but inflation was stifled. Sometimes there are no easy ways out - you have to choose the lesser evil.
US on the brink of stagflation?
In the context of global economic tensions and US tariff policy, the question arises: could the United States once again face stagflation? Although the data do not currently point to such a scenario, there are a number of factors that could contribute to the conditions favorable to this phenomenon.
Firstly, the trade war with China and the very aggressive tariff policy of the Donald Trump administration. The introduction of high tariffs on goods from the Middle Kingdom (reaching up to 145%) may lead to an increase in the prices of raw materials, components and consumer goods. This in turn increases inflation, especially cost inflation, which is difficult to suppress with interest rate hikes.
Secondly, investment uncertainty and a decline in growth dynamics. Companies, not knowing what the future trade policy will look like, are limiting investments, postponing expansion and halting employment. Signs of slowing down are already visible – in the first quarter of 2025, US GDP fell by 0.3%, which may be a harbinger of a deeper weakening of economic activity.
Third, persistent core inflation. Although headline inflation has fallen from its pandemic peaks, the prices of services and everyday goods continue to rise, and wage pressures persist. Companies pass on higher costs to consumers, which can create a wage-price spiral—one of the classic mechanisms leading to stagflation.
Fourth, the Federal Reserve's limited ability to act. The Fed does not have as much room to maneuver today as it did in previous years. Cutting rates too quickly could fuel inflation again, and continuing to do so or raising them could deepen the economic slowdown and weaken demand.
None of this means the US will definitely enter stagflation. But with the current combination of factors – strong trade tensions, geopolitical uncertainty, cost-push inflation and declining growth – it is a risk that cannot be ignored.
At the end…
Stagflation is not an everyday phenomenon. But if it does occur, it is difficult to control. It requires precision, patience, trust in institutions and a very conscious economic policy. And also – ordinary knowledge. Because if we understand how stagflation works, we can prepare for it better. As a state, as a society and as individual households.
You know, one of the most disturbing phenomena in the economy is stagflation. It's a state where inflation is rising and the economy is slowing down at the same time. Does it sound like a contradiction? Because it is – after all, when we talk about inflation, we usually think about an overheated economy, about growth, about everyone spending, about everything spinning. And recession? It's stagnation, deflation, immobility. And yet... stagflation combines both of these phenomena. And that's why it's so disturbing.
The origin of the concept
The term “stagflation” became popular in the 1970s. It was then, during the oil crisis, that the West was dealt a heavy blow. Oil prices shot up, which caused an increase in production costs, and consumer prices followed suit. And instead of the expected growth, economies began to slow down. The effect? Rising inflation, higher unemployment, and a slowdown in growth. Economists were helpless. Because every action had the opposite effect – you fight inflation, you worsen the situation on the labor market. You want to stimulate employment – you tighten inflation.
How does stagflation happen?
Where does stagflation come from? There may be several reasons.
First, supply shocks. Suddenly, something becomes more expensive – oil, gas, grain – and this affects production costs. Companies have to cut costs, so they produce less, employ fewer people, and prices rise.
Secondly, too loose monetary policy. If the state “pumped” money into the economy, but the supply did not keep up – the result could be inflation without real growth.
Third, the rise in labor costs. If wages rise quickly but productivity does not follow, prices rise, companies suffocate, and a spiral begins: higher wages → higher prices → higher wages again…
And one more thing – if people and companies lose trust in the government or the central bank, they stop investing, postpone decisions, buy in advance. And again: stagnation plus inflation.
Why is it so dangerous?
Exactly – what is the worst thing about all this? That governments are in a bind. Because if the economy is slowing down, then normally interest rates are lowered to stimulate it. But if at the same time inflation is rising, such a policy will only deepen it. And if you try to fight inflation, i.e. raise rates – you will worsen the situation on the labor market and “freeze” growth even more. It is like putting out a fire with gasoline or water – both options can be harmful.
For people this means very specific problems:
– money loses value faster than wages grow – you can’t keep up with your expenses,
– it’s harder to find a job – companies are cutting employment,
– the cost of living is soaring – energy, food, services… everything is getting more expensive, even though the economy is at a standstill.
History knows such cases.
The most famous case of stagflation? The 1970s and the OPEC oil embargo. In the US, inflation reached over 10%, unemployment over 7%. The Fed did not react for a long time, but finally Paul Volcker decided to take drastic steps - sharp increases in interest rates. This led to a deep recession, but inflation was stifled. Sometimes there are no easy ways out - you have to choose the lesser evil.
US on the brink of stagflation?
In the context of global economic tensions and US tariff policy, the question arises: could the United States once again face stagflation? Although the data do not currently point to such a scenario, there are a number of factors that could contribute to the conditions favorable to this phenomenon.
Firstly, the trade war with China and the very aggressive tariff policy of the Donald Trump administration. The introduction of high tariffs on goods from the Middle Kingdom (reaching up to 145%) may lead to an increase in the prices of raw materials, components and consumer goods. This in turn increases inflation, especially cost inflation, which is difficult to suppress with interest rate hikes.
Secondly, investment uncertainty and a decline in growth dynamics. Companies, not knowing what the future trade policy will look like, are limiting investments, postponing expansion and halting employment. Signs of slowing down are already visible – in the first quarter of 2025, US GDP fell by 0.3%, which may be a harbinger of a deeper weakening of economic activity.
Third, persistent core inflation. Although headline inflation has fallen from its pandemic peaks, the prices of services and everyday goods continue to rise, and wage pressures persist. Companies pass on higher costs to consumers, which can create a wage-price spiral—one of the classic mechanisms leading to stagflation.
Fourth, the Federal Reserve's limited ability to act. The Fed does not have as much room to maneuver today as it did in previous years. Cutting rates too quickly could fuel inflation again, and continuing to do so or raising them could deepen the economic slowdown and weaken demand.
None of this means the US will definitely enter stagflation. But with the current combination of factors – strong trade tensions, geopolitical uncertainty, cost-push inflation and declining growth – it is a risk that cannot be ignored.
At the end…
Stagflation is not an everyday phenomenon. But if it does occur, it is difficult to control. It requires precision, patience, trust in institutions and a very conscious economic policy. And also – ordinary knowledge. Because if we understand how stagflation works, we can prepare for it better. As a state, as a society and as individual households.
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