Stagflation is a stretch of weak real growth or high unemployment happening at the same time as high inflation. The name blends stagnation and inflation. In a standard demand-driven boom you expect higher prices with stronger hiring; in a typical recession you expect softer prices with weaker hiring. Stagflation breaks that pairing, so a single demand-side lever cannot fix both problems at once.
How to see it on AD-AS
On the aggregate demand and aggregate supply diagram, stagflation usually shows up as a leftward shift of short-run aggregate supply (an adverse supply shock). The price level rises while real output falls relative to the previous short-run equilibrium. Classic classroom examples include a sharp rise in oil or other energy costs that raises firms' marginal costs across many sectors. The textbook case is the 1973–74 oil embargo, when production cuts nearly quadrupled the price of oil from $2.90 to $11.65 a barrel (Federal Reserve History, Oil Shock of 1973–74). Demand can still matter, but the signature of stagflation is the supply-side squeeze.
For the full AD-AS setup, see the aggregate demand and aggregate supply explainer. For inflation measurement, see CPI vs PCE and core vs headline inflation.
The Federal Reserve's own history of the period calls it the era of "stagflation": inflation went from 1 percent in 1964 to over 12 percent ten years later, while unemployment rose from 5 percent to above 7 percent (Federal Reserve History, The Great Inflation).
Why one tool is not enough
- Tighter monetary or fiscal policy can cool inflation by reducing demand, but it risks even weaker output and higher unemployment.
- Looser policy can support jobs and spending, but it risks keeping inflation high if the supply shock has not faded.
- Lasting relief usually needs the supply constraint to ease (cheaper energy, repaired supply chains, higher productive capacity) plus careful demand management.
AP Macro tip
On free-response questions, name the shock (for example, higher input prices), shift SRAS left, state that the price level rises and real output falls, then discuss the policy trade-off: fighting inflation versus supporting employment. Do not invent a guarantee that any one lever ends stagflation quickly.
Sources
- Federal Reserve History, "The Great Inflation" (accessed 5 Nov 2026)
- Federal Reserve History, "Oil Shock of 1973–74" (accessed 5 Nov 2026)
Related reading
- Phillips curve — the inflation–unemployment trade-off that stagflation challenged in the 1970s narrative.
- Output gap and natural rate of unemployment.
- Inflation topic hub and unemployment topic hub.
Frequently asked questions
What is stagflation in simple terms?
Stagflation is when inflation is high at the same time that the economy is weak—low or negative real growth, high unemployment, or both. Prices keep rising even though hiring and output are soft.
What causes stagflation?
Classroom models often point to adverse supply shocks, such as a jump in energy or other input costs that shifts short-run aggregate supply left. Demand shocks alone are a poorer fit for rising prices with falling output.
Can the central bank fix stagflation quickly?
Not with a single easy setting. Tighter policy can help inflation but may deepen the output loss; looser policy can support demand but may leave inflation high. Much depends on whether the supply shock is temporary or persistent.
Is stagflation the same as a recession?
No. A recession is a broad downturn in activity. Stagflation specifically pairs weak real conditions with high inflation. You can have a recession with falling inflation, or high inflation with still-solid growth.