Stagflation: The economic trap that hurts everyone

The Federal Reserve warns the risk is rising

By Mark Huffman of ConsumerAffairs

May 9, 2025

• Stagflation is a rare economic phenomenon where high inflation coincides with stagnant economic growth and rising unemployment.

• Unlike typical inflation or recession scenarios, stagflation presents a dilemma for policymakers, as fixing one problem can worsen another.

• For consumers, stagflation erodes purchasing power while reducing job opportunities, creating widespread financial strain.

As the Federal Reserve concluded its Open Market Committee meeting this week, Fed policymarkers warned of a rising risk of stagflation in the economy. If that sounds scary, it is.

Few economic phenomena are as troublingor as perplexingas stagflation. Combining the worst features of inflation and recession, stagflation represents a grim scenario where prices keep rising, even as economic growth stalls and joblessness increases. For consumers, workers, and policymakers alike, its a triple threat that is as difficult to manage as it is damaging.

What is stagflation?

Stagflation is defined by three co-occurring economic conditions: slow or negative economic growth, high unemployment, and high inflation. While these elements may exist independently in a typical economic downturn or boom, their simultaneous presence is both unusual and troubling.

Normally, inflation is associated with a growing economywhen demand increases, so do prices. Conversely, recessions often bring falling prices and reduced demand. But stagflation disrupts this pattern. It may be triggered by external shocks like a sudden rise in oil prices or policy missteps that stifle growth while failing to contain inflation.

The term gained prominence in the 1970s, particularly during the oil crisis, when rising fuel prices sent shockwaves through the global economy. At the same time, growth stalled and unemployment soared. The result was a prolonged period of economic malaise that confounded economists and led to major shifts in economic theory and policy.

Why its harmful

For everyday consumers, stagflation is punishing. Prices for essentialslike food, gas, and housingcontinue to climb, eroding the purchasing power of wages. But unlike typical inflationary periods, where rising costs are somewhat offset by increased employment or higher earnings, stagflation delivers no such relief. Jobs are harder to come by, and wage growth stagnates or even reverses.

The effect on consumer confidence can be dramatic. Households cut spending, save less, and struggle to afford basic goods. This, in turn, further dampens economic activity, worsening the slowdown.

From a policymakers perspective, stagflation presents a near-impossible balancing act. Raising interest rates might curb inflation, but doing so can further depress economic growth and increase unemployment. Conversely, stimulating the economy through lower rates or government spending risks inflaming inflation. Standard tools become blunt instruments, often exacerbating one problem while trying to fix another.

Tariff turmoil

Recent global economic trends have reignited fears of stagflation. Supply chain disruptions, energy price shocks, and aggressive monetary policy shifts have created conditions reminiscent of past stagflationary periods. Disruptions in international trade triggered by U.S. tariffs raise the spectre of both rising prices for imported goods and a slowdown in U.S. exports.

While economists disagree on whether a full-blown stagflation scenario is unfolding, the Fed is warning of the growing risks.

For consumers, the best defense against stagflation is often prudent financial planning: maintaining emergency savings, managing debt and being cautious about big-ticket expenses. For governments and central banks, the solution is far less clearrequiring a delicate mix of supply-side interventions, targeted stimulus, and inflation control that can take years to bear fruit.

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