What is stagflation, and what makes it so bad?

“I came of age and studied economics in the 1970s and I remember what that terrible period was like. No one wants to see that happen again.”

— Former Secretary of the Treasury Janet Yellen on stagflation

Imagine an economy where you’re paying more for everything, but low economic growth means your income is stagnant, plus the job market is lousy. Combine those three economic ingredients and you get an abysmal dish known as stagflation.

Stagflation is a rare combination of three economic traits, none of them good. Higher inflation, lower economic growth, and rising unemployment.

Why should you care about stagflation?

Picture this:

1. Your rent gets hiked (inflation)
2. You’re not getting a raise or paid what you need to meet expenses (lower economic growth)
3. Hiring is slow or you lose your job (rising unemployment)

You can look for a new place to live, but prices are higher across the board so it may be hard to find a cheaper place. You could also look for a new, higher paying job—but hiring is slow and even if you find a new job, you may not get a raise because wages are stagnant.

This is what makes stagflation double trouble. Prices are higher, but wages and job opportunities are lacking.

Why is stagflation so hard to fix?

It’s this simple. Stagflation is the sum of three problems. And the common fix for one of those problems can make the others worse.

• To fix higher inflation, central banks may have to raise interest rates—but that can make economic growth and unemployment worse, at a time when they’re already bad. It also raises borrowing costs on consumers who are already struggling to keep up with high prices in a tough job market.
• To fix lower economic growth, lower interest rates could help increase spending. But lower rates may also lead to higher inflation, when inflation is already high. And if people are losing their jobs already, they may not be in a position to spend more anyway.
• To fix rising unemployment, you have to stimulate job growth. However, attempts to do that can further fuel inflation and erode purchasing power for consumers and businesses.

So, yes, there are ways to address the individual problems of higher inflation, lower economic growth, and rising unemployment. But there’s no easy solution to stop stagflation.

What causes stagflation?

You need to be old enough to remember riding in cars without seatbelts and gas lines stretching for blocks to recall the last time the US experienced stagflation. So, here’s how stagflation can wrestle hold of an economy:

• If inflation is 2%, which is the Federal Reserve’s target rate, and the economy is growing at 3% per year, that’s a real growth rate of 1%. Low, but positive growth isn’t a problem.
• If inflation doubles to 4% and the economy grows at 3%, the real growth rate drops to -1%. And if the economy isn’t growing at all, real growth drops to -4%. That’s a problem.
• The higher inflation climbs, or the longer it stagnates, the bigger the problem gets. Lower growth also typically means unemployment and a possible recession.

Stagflation also can be accelerated by government policies, from tariffs to immigration.

How stagflation challenges monetary policy

As much as stagflation creates a double whammy for consumers, with rising prices and fewer job opportunities, it puts the Federal Reserve (Fed)—with its dual mandate to fight inflation and keep job growth strong—in a real bind.

Here’s an example: To curb high inflation post COVID, the Fed raised the federal funds rate 11 times between March 2022 and July 2023, increasing the rate from near zero to a range of 5.25% to 5.50%. The central bank then paused rate hikes in late 2023 and began cutting in September 2024, after inflation was more under control. As a result, the Consumer Price Index (CPI) has come down from a four-decade peak of 9.1% in June 2022 to an annual rate of 2.9% in August 2025.¹

Then, responding to job market weakness, the Fed made its first rate cut since December 2024 on September 17, 2025. While lowering rates is the Fed’s tool to stimulate growth and boost employment, concerns remain that rate cuts could push already-too-high inflation even higher. Talk about being stuck between a rock and a hard place.

Combatting stagflation in the 1970s

History offers a roadmap for how the Fed might battle stagflation.

Stagflation in the 1970s began with inflation beginning to climb in the mid-1960s when the US was spending heavily on the Vietnam War and the Great Society, domestic programs initiated by President Lyndon Johnson to address social and economic inequalities. And when the Organization of the Petroleum Exporting Countries’ (OPEC) 1973 oil embargo disrupted global supply, stagflation settled in for the rest of the decade.

By the time Gerald Ford became president in the summer of 1974, 12.3% inflation prompted him to declare it “public enemy number one.”² Ford launched a Whip Inflation Now (WIN) campaign focused on voluntary anti-inflationary initiatives, but it provided little relief. So little, in fact, that when Jimmy Carter defeated Ford and took office in 1977, he called inflation the nation's most pressing domestic problem.³

Later, Carter singled out the energy crisis as the “greatest challenge our country will face during our lifetimes.”⁴ Rising energy costs, from production to transportation, forced companies to lay off employees or raise prices. That resulted both in rising unemployment and accelerated inflation that persisted throughout the decade.

In response, then Fed Chairman Paul Volcker announced a dramatic shift in monetary policy in 1979, raising interest rates to slow the economy and curb inflation. The "Volcker Shock" raised the federal funds rate from about 11% in 1979 to a peak of around 20% in June 1981. This did finally bring inflation down from around 14% in the late 1970s to below 4% by 1983—but it led to 10% unemployment and a recession in 1980-1982.

Ultimately, it took aggressive monetary policy and painful short-term consequences to break the cycle of stagflation.

But stagflation isn’t always accompanied by a recession. Growth can just stagnate alongside persistent inflation.

Stagflation versus recession: What’s the difference?

While stagflation is rare, recession is a common, recurring feature of economies worldwide. While recessions are a normal part of the economic business cycle, they are generally triggered by specific events or conditions, including economic shocks, interest rate increases, financial bubbles, or unforeseen events like the COVID-19 pandemic.

Stagflation can be hard to eliminate. Like disco, the last period of stagflation lasted throughout the 1970s and into the early 1980s. That’s because solutions that address one cause of stagflation tend to make the others worse. For example, higher interest rates aimed at curbing inflation can slow growth and increase unemployment.

Recessions typically end within a year. Since 1945, the US has experienced a dozen recessions which lasted an average of 10 months. The longest recession lasted 18 months and the shortest one, two months. Of course, though they are brief, it can take a longer time for the economy to fully recover to its previous levels once a recession ends.

High unemployment and low growth are common to both stagflation and recessions—but inflation trends are different. Prices tend to rise much faster than GDP in stagflation. But inflation tends to fall during a recession, as lower demand for goods and services holds prices down.

In that sense, inflation always bears watching for guidance on whether the economy is approaching stagflation or a recession. That’s especially true because, according to Strategas Research Partners, it’s rare for inflation in the US to have just one wave of price surges. More commonly, inflation resurfaces in multiple waves. In fact, a second wave of inflation starts on average 30 months after the first peak.

Investing during stagflation

Stagflation means prolonged pain for investors. Unlike a recession—where falling growth typically leads to lower prices—stagflation’s burden is higher costs at a time when wages and job opportunities are in decline.

Both stocks and bonds can suffer when stagflation takes hold. That means investors should consider diversifying the traditional 60/40 portfolios split between stocks and bonds with inflation-resistant asset classes such as commodities, gold, real estate, Treasury Inflation-Protected Securities (TIPS), high-quality dividend stocks, and defensive sectors like Consumer Staples, Utilities, and Health Care.

Investing in ETFs during stagflation

Exchange traded funds (ETFs) can help investors navigate the challenges of stagflation’s high inflation and slow economic growth by offering:

While stagflation presents challenges for policymakers and investors alike, ETFs offer a practical way to build portfolio resilience and pursue emerging opportunities amid rising prices and slowing growth.

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