Atlas Macro

Economy

Stagflation

An economic cycle characterized by slow economic growth and relatively high unemployment—economic stagnation—accompanied by rising prices (inflation). It presents a dilemma for economic policy, since actions designed to lower inflation may exacerbate unemployment.

Key points

  • Worst-case scenario for central banks.
  • Typically caused by supply shocks (e.g., oil crisis).
  • Equities and bonds tends to perform poorly together during stagflation.

Example

In 2022, first estimates showed US GDP shrinking in the first half of the year while CPI inflation reached 9%, raising fears of a 1970s-style episode.

In history

In the 1970s, US inflation twice rose above 10% with recessions in between. Paul Volcker's Fed raised the fed funds rate to around 20% in 1980-81 to break it.

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