Cost-push stagflation arises when production costs escalate significantly, forcing businesses to raise prices to maintain profitability. This upward pressure on prices is triggered by factors that increase the cost of inputs for businesses, such as raw materials, labor, energy, or transportation. This rapid expansion of demand, often fueled by factors like increased consumer spending, government stimulus packages, or easy access to credit, can drive prices upwards as consumers compete for scarce resources. Essentially, there is simply more money chasing fewer goods, leading to inflationary pressure. Stagflation arises from a complex interplay of factors such as supply shocks, rising production costs, and wage pressures.
Below, we take you through stagflation’s history, why conventional economic theories have found it so difficult to address, and the pain it inflicts on everyday people who see spiraling prices as job losses mount. “While prices are on the firm side and growth has cooled from a too-warm pace, unemployment remains closer to historic lows than not,” said Keith Gumbinger, vice president at housing market news site HSH.com. Stagflation is typically measured by the “misery index,” the sum of the unemployment rate and the inflation rate, reflecting the level of economic distress felt by the average person. Pending tariffs could mean rising prices on a variety of goods from leather goods to apparel to cars. That may tempt consumers to want to rush to buy the products they anticipate they will need, in order to save money.
Stagflation vs. inflation
High unemployment, possibly leading to fewer goods and services being produced, combined with high inflation, possibly leading to fewer goods and services being bought, could cause a recession—a prolonged period of negative economic growth. A recession could mean poor stock market performance too, because of the lack of growth as well as the fact that people may invest less money and sell investments they already owned. Unlike recessions, where bonds tend to do well as interest rates fall, stagflation often erodes the value of both stocks and bonds. In such periods, equities can suffer from declining corporate profits due to rising input costs, as well as weakening consumer demand, creating varied headwinds for the stock market.
- Inflation eats into the fixed income stream provided by bonds, especially longer-term bonds.
- It gained broader recognition in the 1970s after a series of global economic shocks, particularly the 1973 oil crisis, which disrupted supply chains and led to rising prices and slowing growth.
- Eager to soothe worried investors, businesses and consumers, the Fed urged caution about getting too worked up about its forecast, noting that inflation caused by tariffs may not be long lasting.
“We suggest folks stay invested in the market – focusing on investments that are in line with their risk tolerance and objectives.” He adds that investors should also stay focused on high-quality picks. That painful cure became the playbook for handling runaway prices, with central banks committing to maintaining credibility and acting decisively, even at the cost of job losses. A combination of geopolitical shocks, fragile supply chains and new economic policies — particularly a sweeping series of tariffs enacted by the Trump administration — has created a perfect stagflation storm, economists say. When weighing big purchasing decisions—like a car, for example—consider whether you can defer or delay the purchase of items where prices may be temporarily elevated, he adds. McMillan argues that based on the 1970s definition, the U.S. could have experienced stagflation—there was a supply shock caused by pandemic-related supply chain issues and a significant increase in the money supply due to the Fed’s policies.
What Is Stagflation?
One effective approach might involve incorporating alternative assets, such as real trading systems assets, private credit, and asset-backed securities. Since these assets often have lower correlation with the performance of publicly traded equities and fixed income, they can serve as a valuable component of a hedging strategy should stagflation begin to emerge. With inflation reaching a 40-year high in 2022 and unemployment reaching the highest rate since the Great Depression in 2020, it’s natural to be concerned about stagflation in the U.S. However, both of these indicators have improved, with inflation ebbing from 6.6% in September 2022 to 3.0% in January 2025. Fixed-income investors can turn to shorter-duration bonds and Treasury inflation-protected securities (TIPS), which adjust their principal to match inflation, to minimize the impact of rising inflation.
ways to recession-proof your life
If your savings cover at least three to six months of living expenses, you can more easily weather a financial storm without relying on credit cards or retirement savings. Stagflation could feel like a recession with the added pain of high prices, making it difficult to prepare for and even harder to navigate. Still, experts say you’ll want to take some of the same steps you would ahead of an economic downturn. Right now, there are some signs of tariff-related inflation, but the full impact on consumer prices likely won’t be seen for several months. When short-term bond interest rates become higher than long-term rates, it can signal that investors expect a weaker economy ahead.
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- Stagflation poses significant challenges for policymakers striving to balance economic stability and growth.
- Consult with an adviser about inflation-resistant assets and having a more balanced portfolio based on your individual risk tolerance, age and financial goals.
- It was mainly driven by external factors such as the OPEC oil crisis and supply shocks.
- The US central bank has kept interest rates unchanged this year, despite calls from President Donald Trump to lower borrowing costs.
- Read on to learn more about this economically depressing decade of oil embargos, brownouts, gas lines and crazy inflation.
But it would be a worse economic prognosis than a recession, a long-lasting shock to the system, especially as the government lacks effective policy prescriptions to control it. Yet, according to JPMorgan & Chase CEO Jamie Dimon, the odds of stagflation, “which is basically a recession with inflation,” are roughly double what the market thinks. The tariffs remain “pretty extreme,” even at their lower levels, Dimon noted on Monday. “The risks of higher unemployment and higher inflation appear to have risen,” Federal Reserve Chairman Jerome Powell said on May 7.
While Keynesian economics has been influential in shaping economic policy worldwide, its effectiveness in managing stagflation has been debated. Critics argue that increased government spending during a period of high inflation could exacerbate price pressures without adequately addressing unemployment. Understanding stagflation helps consumers, investors, and businesses prepare for complex market conditions — and highlights the challenges central banks face in maintaining a stable economy. This was a result of increased unionization and strong labour bargaining power. Workers demanded higher wages to keep up with the soaring cost of living, which further fueled inflationary pressures. When workers demand higher wages to keep up with the rising cost of living, businesses may respond by increasing prices to cover the additional labour costs.
Additionally, the pervasive uncertainty negatively impacts consumer confidence, further curbing spending habits. This material is intended for the exclusive use of recipients in jurisdictions who are allowed to receive the material under their applicable law. The opinions expressed are those of the author(s) and are subject to change without notice. Our investment teams may hold different views and make different investment decisions.
“Stagflation also poses a risk to bonds since the fixed interest rates they offer might not be high enough to offset the loss of buying power given the high rate of inflation.” The Federal Reserve is tasked with keeping prices stable and unemployment low. This becomes particularly difficult when the primary tool for combatting the first exacerbates the second. The 1970s are known for many things, but the one economists are most likely to recall is stagflation, the combination of high inflation and unemployment that can cripple an economy and investor portfolios. If businesses struggle to find workers, productivity can decline, causing prices to increase regardless of how the economy is performing.
This makes stagflation a particularly difficult scenario to manage, requiring careful consideration of complex trade-offs and a nuanced approach to policymaking. The combination of cost-push inflation, driven by rising energy prices, and sclerotic economic growth led to widespread economic hardship. Unemployment rates soared, consumer purchasing power plummeted, and businesses struggled with declining profits. The global stagflationary crisis also contributed to political instability and social unrest in many developed nations. With stagflation, the normal relationship between growth and inflation is inverted.
During the 1970s, the rate of inflation was already rising when a series of oil supply shocks caused by the Organization of Petroleum Exporting Countries (OPEC) oil embargoes resulted in oil prices tripling or even quadrupling very quickly. Stagflation combines stagnant economic ichimoku kinko hyo growth, high unemployment, and persistent inflation. It defies traditional economic models, which typically show inflation rising during strong economic growth and falling during recessions. Over the last couple of months, President Trump’s turbulent tariff agenda has resurrected fears of this rare and toxic scenario in which prices rise as the economy slows and the labor market suffers.
However, there are several ways individuals can minimize their personal exposure ahead of those risks, experts say. The CFIB report also said inflation in Q1 rose by 2.4 per cent but will rise further to 2.7 per cent in Q2 — well above the Bank of Canada’s target range of oanda review two per cent. President Donald Trump’s tariffs, which threaten to upend global trading systems. International cooperation also played a role, with organizations like the IMF and World Bank providing financial assistance and promoting structural adjustments in developing countries struggling with stagflationary pressures. Jane Jacobs, a celebrated urban planner and activist, proposed a unique perspective on mitigating stagflation, focusing on the role of vibrant and diverse cities. You can change your settings at any time, including withdrawing your consent, by using the toggles on the Cookie Policy, or by clicking on the manage consent button at the bottom of the screen.
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In stagflation, they rise together — creating a troubling scenario for policymakers. It erodes consumer purchasing power and enforces difficult choices on households. Inflation reduces the value of money, making everyday goods and services more expensive. As a result, individuals have less disposable income, leading to reduced spending and a decline in overall economic activity.
Real-world Applications of Stagflation in Indian
Inflation eats into the fixed income stream provided by bonds, especially longer-term bonds. As inflation rises, the purchasing power of interest payments declines, and yields on newly issued bonds increase to compensate investors, driving down the market value of existing lower-yield bonds. The misery index, created to measure such bleak periods, adds the unemployment rate to the inflation rate. As of March 25, 2025, it stood at around 6.6, with inflation at 2.4 percent and unemployment at 4.2 percent. Many economists fear that number could rise quickly if current trends continue.
Stagflation challenges traditional economic models that rely on the Phillips curve, where inflation and unemployment are expected to have an inverse relationship. According to classic theory, high inflation should coincide with low unemployment and vice versa, simplifying control through interest rate adjustments. However, stagflation disrupts this pattern, presenting a perplexing paradox that demands innovative solutions from central bankers and policymakers. Unemployment denotes the number of individuals actively searching for employment but encountering difficulty in securing jobs. It serves as a crucial economic indicator reflecting the well-being of the labour market.
Production capacity struggles to keep pace with surging demand, causing bottlenecks and shortages. This imbalance between supply and demand results in rising prices across a broad range of goods and services, effectively leading to stagflation. Furthermore, stagflation is often marked by persistently high unemployment rates.
