What is stagflation?

Stagflation refers specifically to the economic condition characterized by the occurrence of both inflation and unemployment rising simultaneously. This situation poses a unique challenge for economic policy, as the usual tools to combat inflation can exacerbate unemployment, and vice versa.

During stagflation, prices of goods and services increase, which is known as inflation, while at the same time, economic growth stagnates, leading to higher unemployment rates. This combination can result in a difficult economic environment where individuals face rising costs of living without the benefit of securing jobs or increased wages.

Understanding stagflation is crucial because it reflects a scenario where standard economic theories often fall short in providing effective solutions, requiring policymakers to carefully balance their approaches to both inflation control and job creation.