Stagflation happens when an economy experiences high unemployment rates combined with stagnation or negative growth (recession) and rising prices (inflation). There are strategies to combat recession and inflation individually, but since these are conflicting effects, the combination of both makes stagflation challenging to control.



Introduction
On one side, economic stagnation or negative growth can be addressed by increasing the money supply, making it cheaper for companies to borrow money (lower interest rates). More money available leads to expansion and higher employment rates, which can effectively prevent or combat a recession.

In contrast, economists and policymakers often try to control rising inflation by reducing the money supply to slow the economy down. This can be done by raising interest rates, making it more expensive to borrow money. Businesses and consumers borrow and spend less, and the reduced demand causes prices to stop rising.

However, when an economy experiences stagflation, we have the worst of both sides: a recession combined with high inflation. Let’s dive deeper to understand what stagflation is, its common causes, and potential solutions.




What is stagflation?
Stagflation is a macroeconomic concept first mentioned in 1965 by Iain Macleod, a British politician and Chancellor of the Exchequer. The name is a combination of stagnation and inflation, describing an economy experiencing minimal or negative economic growth and high unemployment combined with rising consumer prices (inflation).
The typical economic controls used to combat each condition individually can worsen the other, making stagflation tricky for a government or central bank to deal with. Usually, high levels of employment and growth positively correlate with inflation, but that’s not the case with stagflation.

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