What characterizes "stagflation"?

Stagflation is characterized by a combination of high inflation and high unemployment alongside stagnant economic growth. This phenomenon presents a significant challenge for policymakers since the traditional tools to combat inflation, such as raising interest rates, can exacerbate unemployment and stifle growth. Conversely, measures intended to reduce unemployment and stimulate economic growth, such as increasing government spending, may contribute to higher inflation.

This unique situation highlights the complexities that arise when the economy faces both rising prices and falling production capacity, creating a paradox that deviates from typical economic expectations. Understanding stagflation is crucial, as it underscores the difficulties in balancing economic stability, price levels, and employment rates during challenging economic times. This contrasts sharply with other conditions like rapid growth with low unemployment or steady inflation rates, which suggest healthier economic environments.