What does "stagflation" refer to?

Stagflation refers to a situation in the economy where there is high inflation combined with stagnation or high unemployment. This scenario presents a challenging economic condition because, unlike traditional inflationary periods where economic growth is present, stagflation occurs when the economy is at a standstill or is slow to grow while prices continue to rise.

In this context, the term captures the dual phenomenon of increasing prices—indicating declining purchasing power—and persistent unemployment—suggesting that the labor market is not improving. This presents a dilemma for policymakers, as measures to control inflation could potentially exacerbate unemployment, and strategies to reduce unemployment could drive inflation even higher.

Understanding stagflation is crucial for analyzing economic conditions, as it highlights the complexity of managing an economy that faces both inflationary pressures and lack of economic growth.