Stagflation

The word "stagflation" blends "stagnation" (an economy barely growing or shrinking) with "inflation" (a general rise in prices). Standard economic thinking once assumed the two couldn't easily coexist — when growth slows, demand typically falls and so do prices. The 1970s proved otherwise, when oil shocks and loose monetary policy combined to produce years of both rising prices and rising unemployment across major economies.

Stagflation creates a difficult puzzle for policymakers. The usual tool for fighting inflation — raising interest rates — tends to slow growth further and push unemployment higher. Yet cutting rates to stimulate the economy risks making inflation even worse. There is no easy lever to pull in both directions at once.

In market data, stagflation typically shows up as a combination of readings: stubbornly elevated CPI (Consumer Price Index, the standard inflation measure), a rising unemployment rate, and weak or negative GDP growth figures. Traders typically watch all three together, because any one metric in isolation won't tell the full story. Commodity price shocks — especially in energy — are historically among the most common triggers.