# Stagflation Canonical: https://web4.xpay.bi/en/wiki/wp-en-26818/ Language: en Published: 2026-10-25T18:58:00.178Z Updated: 2026-10-25T18:58:00.178Z Stagflation is the combination of high inflation, stagnant economic growth, and elevated unemployment. The term stagflation, a portmanteau of "stagnation" and "inflation", was popularized and probably coined by British politician Iain Macleod in the 1960s, during a period of economic distress in the United Kingdom. It gained broader recognition in the 1970s after a series of global econo ## Key facts ## Overview Stagflation is the combination of high inflation, stagnant economic growth, and elevated unemployment. The term stagflation, a portmanteau of "stagnation" and "inflation", was popularized and probably coined by British politician Iain Macleod in the 1960s, during a period of economic distress in the United Kingdom. It gained broader recognition in the 1970s after a series of global economic shocks, such as the closure of the Suez Canal (1967–1975) and the 1973 oil crisis, which disrupted supply chains and led to rising prices and slowing growth. Stagflation challenges traditional economic theories, which suggest that inflation and unemployment are inversely related, as depicted by the Phillips Curve. Stagflation presents a policy dilemma, as measures to curb inflation—such as tightening monetary policy—can exacerbate unemployment, while policies aimed at reducing unemployment may fuel inflation. In economic theory, there are two main explanations for stagflation: supply shocks, such as a sharp increase in oil prices, and misguided government policies that hinder industrial output while expanding the money supply too rapidly. The stagflation of the 1970s led to a reevaluation of Keynesian economic policies and contributed to the rise of alternative economic theories, including monetarism and supply-side economics. ## Etymology The term, a portmanteau of stagnation and inflation, is generally attributed to Iain Macleod, a British Conservative Party politician who became Chancellor of the Exchequer in 1970. Macleod used the word in a 1965 speech to Parliament during a period of simultaneously high inflation and unemployment in the United Kingdom. Warning the House of Commons of the gravity of the situation, he said: We now have the worst of both worlds—not just inflation on the one side or stagnation on the other, but both of them together. We have a sort of "stagflation" situation. And history, in modern terms, is indeed being made. Macleod used the term again on 7 July 1970, and the media began also to use it, for example in The Economist on 15 August 1970, and Newsweek on 19 March 1973. John Maynard Keynes did not use the term, but some of his work refers to the conditions that most would recognise as stagflation. ## 1976 Sterling crisis The United Kingdom experienced an outbreak of inflation in the 1960s and 1970s. As inflation rose, British policy makers failed to recognise the primary role of monetary policy in controlling inflation. They tried to use non-monetary policies and devices to respond to the economic crisis. Policy makers also made "inaccurate estimates of the degree of excess demand in the economy, \[which\] contributed significantly to the outbreak of inflation in the United Kingdom in the 1960s and 1970s." Stagflation was not limited to the United Kingdom. Economists have shown that stagflation was prevalent among seven major market economies from 1973 to 1982. After inflation rates began to fall in 1982, economists' focus shifted from the causes of stagflation to the "determinants of productivity growth and the effects of real wages on the demand for labor". ## Causes Economists offer two principal explanations for why stagflation occurs. First, stagflation can result when the economy faces a supply shock, such as a rapid increase in the price of oil. An unfavourable situation like that tends to raise prices at the same time as it slows economic growth by making production more costly and less profitable. Second, the government can cause stagflation if it creates policies that harm industry while growing the money supply too quickly. These two things would probably have to occur together because policies that slow economic growth rarely cause inflation, and policies that cause inflation rarely slow economic growth. ## Supply shock As soon as the Six-Day War started in 1967 and Israel invaded the Sinai Peninsula down to the Suez Canal, the Egyptian President Gamal Abdel Nasser, who was aligning with the Soviet Union, closed down the Suez Canal for eight years. Oil from the Middle East to Europe had to be rerouted around Africa. Egypt then tried to cross the Suez Canal and take back the Sinai Peninsula in the Yom Kippur War in late 1973. Richard Nixon supported funding Israel with $2.2 billion over the conflict, which triggered an oil embargo in October 1973 when the countries of the Organization of Arab Petroleum Exporting Countries (OAPEC) cut production of oil and placed an embargo on oil exports to the United States and other countries backing Israel. ## Excess demand Money supply in the early 1970s increased at almost 15% year over year in the United States and the Consumer price index lags behind about one year or two. Britain's monetary policy was also dovish causing excess demand. ## End of Bretton Woods system In the mid 1970s, the Bretton Woods system was failing. The fixed exchange rate between countries' currencies started to float, and the gold standard, under which currencies were pegged to gold, was abandoned. After many years of stability, the price of gold and oil became very volatile. ## Other reasons There is evidence supporting the second explanation against the supply shock view that the 1970s stagflation was due to OPEC's quadrupling of oil prices in October 1973. Data show that its seeds were sown during the late 1960s and began to be reaped in that decade. Between 1968 and 1970 unemployment rose from 3.6% to 4.9% while the CPI inflation rose from 4.7% to 5.6%. Further in the Michigan survey expected inflation rose from 3.8% to 4.9% between 1967 and 1970. The rise in expected inflation strongly supports the view that Expected Augmented Phillips Curve (EAPC) can explain the early, mild stagflation. Although the weakening economy was putting some downward pressure on inflation overall inflation rose in accordance with EAPC, as expected inflation kept rising. The stagflation became more severe in the early 1970s but was suppressed by the price controls and wage freeze imposed by President Nixon starting in August 1971 and through 1972. But when the controls were lifted in mid-1973 the CPI surged to 8.5%. Arguably, if there were no wage-price controls, the mini stagflation documented above would have been clearly evident before the October 1973 OPEC oil price hike. As for the direct impact of dollar depreciation on inflation, data again imply that just as higher inflation shifted up the labor supply curve and made workers demand and get higher money wages, similarly a falling dollar made commodity producers demand higher prices to compensate for the dollar decline. Further, the weakening of the dollar, while exogeneous to oil prices, was itself a delayed response to rising inflation from 1968 onwards. This pattern of an overheated economy, leading to inflation, dollar depreciation, and then to higher oil prices and another bout of stagflation repeated itself in 1979. Both explanations are offered in analyses of the 1970s stagflation in the West. It began with a large rise in oil prices, but then continued as central banks used excessively stimulative monetary policy to counteract the resulting recession, thereby causing a price/wage spiral. Increased requirements on skill (education and experience) on work force, for example because of increased technical complexity, can cause shortage on skilled employees and rising salaries for them, at the same time as uneducated work tasks have in part moved to low salary countries such as in Asia, causing high unemployment. ## Early Keynesianism and monetarism Up to the 1960s, many Keynesian economists ignored the possibility of stagflation, because history suggested high unemployment correlated with low inflation, and vice versa (the Phillips curve). The idea was that high demand for goods drives up prices and encourages firms to hire more; and high employment raises demand. However, in the 1970s and 1980s, when stagflation occurred, it became clear that the relationship between inflation and employment levels was not necessarily stable: that is, the Phillips relationship could shift. Macroeconomists became more sceptical of Keynesian theories, and Keynesians reconsidered their ideas in search of an explanation for stagflation. Explanations for the shift of the Phillips curve were initially provided by the monetarist economist Milton Friedman, and also by Edmund Phelps. Both argued that when workers and firms expect more inflation, the Phillips curve shifts up (meaning that more inflation occurs at any given level of unemployment). In particular, they suggested that if inflation lasted for several years, workers and firms would start to take it into account during wage negotiations, causing workers' wages and firms' costs to rise more quickly, thus further increasing inflation. While this idea was a criticism of early Keynesian theories, it was gradually accepted by most Keynesians, and has been incorporated into New Keynesian economic models. ## Neo-Keynesianism Neo-Keynesian theory distinguished two distinct kinds of inflation: demand-pull (caused by shifts of the aggregate demand curve) and cost-push (caused by shifts of the aggregate supply curve). Stagflation, in this view, is caused by cost-push inflation. Cost-push inflation occurs when some force or condition increases the costs of production. This could be caused by government policies (such as taxes) or from purely external factors such as a shortage of natural resources or an act of war. Contemporary Keynesian analyses argue that stagflation can be understood by distinguishing factors that affect aggregate demand from those that affect aggregate supply. While monetary and fiscal policy can be used to stabilise the economy in the face of aggregate demand fluctuations, they are not very useful in confronting aggregate supply fluctuations. In particular, an adverse shock to aggregate supply, such as an increase in oil prices, can give rise to stagflation. ## Fundamentals Supply theories are based on the neo-Keynesian cost-push model and attribute stagflation to large disruptions to the supply side of the supply-demand market equation, such as when there is a sudden scarcity of key commodities, natural resources, or the natural capital needed to produce goods and services. In this view, stagflation is thought to occur when there is an adverse supply shock (for example, a sudden increase in the price of oil or a new tax) that causes a subsequent jump in the "cost" of goods and services (often at the wholesale level). In technical terms, this leads to contraction or negative shift in an economy's aggregate supply curve. In the resource scarcity scenario (Zinam 1982), stagflation results when a restricted supply of raw materials inhibits economic growth. That is, when the supply of basic materials (fossil fuels (energy), minerals, agricultural land in production, timber, etc.) decreases and/or cannot rise fast enough to respond to demand. The resource shortage may be real or relative due to factors such as taxes or bad monetary policy influencing the "cost" or availability of raw materials. This is consistent with the cost-push inflation factors in neo-Keynesian theory (above). After supply shock occurs, the economy tries to maintain momentum. That is, consumers and businesses begin paying higher prices to maintain their level of demand. The central bank may exacerbate this by increasing the money supply, by lowering interest rates for example, in an effort to combat a recession. The increased money supply props up the demand for goods and services, though demand would normally drop during a recession. In the Keynesian model, higher prices prompt increases in the supply of goods and services. However, during a supply shock (i.e., scarcity, "bottleneck" in resources, etc.), supplies do not respond as they normally would to these price pressures. So, inflation jumps and output drops, producing stagflation. ## Explaining the 1970s stagflation Following Richard Nixon's imposition of wage and price controls on 15 August 1971, an initial wave of cost-push shocks in commodities were blamed for causing spiraling prices. The second major shock was the 1973 oil crisis, when the Organization of Petroleum Exporting Countries (OPEC) constrained the worldwide supply of oil. Both events, combined with the overall energy shortage that characterised the 1970s, resulted in actual or relative scarcity of raw materials. The price controls resulted in shortages at the point of purchase, causing, for example, queues of consumers at fuelling stations and increased production costs for industry. ## Sources - Stagflation · Wikipedia: https://en.wikipedia.org/?curid=26818 Source: Wikipedia contributors — https://en.wikipedia.org/?curid=26818&oldid=1377220899 Licence: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation notice: Reformatted for XPay; the source may be abridged, restructured or translated. Consult the cited revision for the original.