{"id":207134,"date":"2025-08-15T07:55:48","date_gmt":"2025-08-15T07:55:48","guid":{"rendered":"https:\/\/ibkrcampus.eu\/campus\/?p=207134"},"modified":"2025-08-18T07:36:38","modified_gmt":"2025-08-18T07:36:38","slug":"what-is-stagflation-and-can-policymakers-do-anything-about-it","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.eu\/campus\/traders-insight\/securities\/macro\/what-is-stagflation-and-can-policymakers-do-anything-about-it\/","title":{"rendered":"What is stagflation, and can policymakers do anything about it?"},"content":{"rendered":"\n

Originally posted August 13, 2025 – What is stagflation, and can policymakers do anything about it?<\/a><\/p>\n\n\n\n

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\"Person<\/figure>\n\n\n\n

The effects of ongoing tariffs may be starting to show up in the economy. With job growth falling and the price of goods rising, some see the potential for stagflation. But what we\u2019re experiencing is neither stagnation nor high inflation<\/a>. The topic remains part of the public conversation, and concerns are rising. What is stagflation exactly, and can policymakers do anything about it?<\/p>\n\n\n\n

What is stagflation?<\/strong><\/h2>\n\n\n\n

Stagflation is a mashup of the words \u201cstagnation\u201d and \u201cinflation.\u201d Likely coined by British politician Iain Macleod in the 1960s, the term describes the combination of a flat or shrinking economy with elevated unemployment and high inflation. Stagflation took hold in the 1970s when a stagnant US economy saw oil prices skyrocket, fueling inflation across the economy.<\/p>\n\n\n\n

This unique economic climate can prove devastating to consumers and businesses and difficult to deal with for governments.<\/p>\n\n\n\n

Stagnating economy<\/h3>\n\n\n\n

When an economy slows or stops growing, consumers and businesses tend to spend less. Consumers typically buy fewer things and delay large expenses. Businesses often make fewer capital improvements and avoid hiring new staff. Stagnation is a normal part of the business cycle, and while not preferable, won\u2019t necessarily lead to stagflation on its own.<\/p>\n\n\n\n

High inflation<\/h3>\n\n\n\n

A stagnating economy tends to have low inflation given the pullback on spending. But this doesn\u2019t always happen. If conditions are right, inflation can sometimes rise. Rising prices push up the cost of living. And adding high inflation to economic stagnation raises the potential for stagflation.<\/p>\n\n\n\n

High unemployment<\/h3>\n\n\n\n

The third condition is high unemployment which exacerbates the economic stagnation. Fewer consumers have jobs, and those who do may not feel as comfortable in them. Wages may not keep pace with rising prices, which erodes purchasing power.<\/p>\n\n\n\n

What can cause stagflation?<\/strong><\/h2>\n\n\n\n

A slow-growing economy tends to have low inflation. But with stagflation, the traditional rules of economics don\u2019t seem to apply. Certain conditions can give rise to or exacerbate a stagflationary environment.<\/p>\n\n\n\n

Supply shocks<\/h3>\n\n\n\n

Supply shocks refer to a sudden disruption in the availability of key goods and resources. Drastic price increases tend to get passed along to the buyer which can push up inflation. The economy struggles to grow under the additional weight placed on consumers and businesses.<\/p>\n\n\n\n

Monetary policy errors<\/h3>\n\n\n\n

The Federal Reserve<\/a> (Fed) manages monetary policy to keep prices stable and unemployment low. This difficult balancing act can contribute to stagflation if mismanaged.<\/p>\n\n\n\n

Regulatory and tax changes<\/strong><\/h3>\n\n\n\n

In certain circumstances, regulatory and tax changes can help push an economy into stagflation. New regulations can increase the cost of doing business, while higher taxes reduce disposable income. Both can dampen economic activity. While these changes may be necessary in the moment, they can inadvertently lead to stagflation if not carefully balanced.<\/p>\n\n\n\n

Global economic influences<\/strong><\/h3>\n\n\n\n

No economy exists in a vacuum. Global economic factors can contribute to stagflation in many ways.<\/p>\n\n\n\n