What is stagflation: An explainer
Editorial staff, J.P. Morgan Wealth Management
- “Stagflation” denotes a period during which the economy is not growing but in which prices are rising.
- It can be difficult for governments to navigate periods of stagflation because monetary tools can be counterproductive to resolving this issue.
- Stagflation can have severe and long-term consequences for consumers.
What is stagflation?
Economists use various terms to describe how healthy (or not) the economy is. Periods of high inflation, for example, refer to times when prices for goods and services increase quickly. In many cases, periods of high inflation also have high job growth and low unemployment. In other words, you might have to pay more for goods, but there’s less of a chance that you’ll be laid off or have trouble finding a job if you need one. Governments may react to inflationary periods by raising interest rates to make borrowing more expensive, in order to slow down spending.
A stagnant economy is one in which there is little job or economic growth. To kickstart a stagnant economy, the government may lower interest rates, cut taxes, increase government spending or some combination of these things in the hopes of spurring spending to jumpstart the economy. So while you might be able to get a low interest rate on a house during one of these periods, for example, you may run the risk of being laid off or struggling to find a job if you need one.
A period of stagflation in many ways combines the worst of these economic conditions: Inflation will be high, but overall economic growth will be low. The unemployment rate will likely be higher than average as well.
The term stagflation was coined by British politician Iain Macleod in a 1965 speech to British Parliament during a period of simultaneously high inflation and unemployment in the U.K.
Elyse Ausenbaugh, Head of Investment Strategy at J.P. Morgan Wealth Management, says, “The U.S. association with stagflation recalls the 1970s, when [the Organization of the Petroleum Exporting Countries] OPEC imposed an oil embargo that sent fuel prices skyrocketing and overall inflation into the double digits. As businesses passed higher costs on to consumers, growth stagnated and unemployment rose.”
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What causes stagflation?
A lack of confidence in the economy – which can be the result of a myriad of factors – can cause high unemployment, and significant shocks to the financial system can also exacerbate issues and make it hard for inflation to come back down to normal levels. These factors, in turn, can lead to stagflation. The root causes of these financial issues will vary based on the unique circumstances of the time.
What have been some periods of stagflation in history?
Stagflationary periods are rarer than other turbulent economic periods, but there have been some examples in recent history. Two notable ones include:
The 1970s in the U.S and the U.K.: One of the most famous periods of stagflation occurred in the 1970s in both the U.S. and U.K. In the U.S., inflation rose from just under 4% in 1968 to 12% from 1975 to 1987 while real growth fell, and the unemployment rate in the U.S. stayed close to or above 6% from 1974 to 1987. Stagflation in the U.K. in the 1970s had a severe impact, with inflation reaching over 25% in 1975 and unemployment reaching levels not seen in the country since the 1930s.
Latin America in the 1980s: Several Latin American countries, including Argentina and Brazil, faced severe stagflationary crises in the 1980s due to excessive government borrowing, external debt crises and a period of inflation.
What are the consequences of stagflation?
Stagflation can have significant consequences, some of which depend on how a government decides to tackle it. A lack of economic confidence can hurt and perhaps increase stagflation, as was seen in the late 1970s in the U.S. Faced with geopolitical uncertainty, such as the OPEC oil embargo and the Iranian Revolution, markets struggled to self-correct.
“The Federal Reserve tried to get inflation back in check by ripping interest rates higher, which compounded the economic woes,” Ausenbaugh shared. “Stocks tumbled, and bonds struggled. Some shelter was found in assets like gold, but it was a generally painful era for businesses, consumers and investors alike.”
Are we in a period of stagflation right now?
There are certain bellwethers that highlight when a country has shifted from one economic period to another. For example, a recession typically means that there has been negative economic growth for two consecutive quarters, while the term depression often describes an economic decline of 10% or more., Keep in mind, though, that these definitions can vary slightly from economist to economist. The National Bureau of Economic Research (NBER) is responsible for officially declaring recessions in the U.S. based a range of factors, and no official body in the U.S. declares depressions.
There is no universally accepted benchmark for when a country is in a stagflationary period, though. Much of the current conversation about possible stagflation in the U.S. economy revolves around the potential impact of tariffs.
“Tariffs could bring a simultaneous slowdown in economic growth and rise in inflation, a directionally stagflationary mix,” Ausenbaugh shared. While it’s certainly a watch item for economists, no indicators point to the U.S. being in a period of stagflation as of July 2025.
How should you invest during stagflationary periods
Many investing experts will repeat the same adage: Don’t try to time the market. What that means is that you shouldn’t try to invest differently just because certain economic circumstances have changed.
That said, there are certain investments to potentially watch should the U.S. enter into a period of stagflation.
Ausenbaugh said: “Diversification is key to building resilience of a portfolio to such an outcome. Gold, hard asset exposure like real estate and infrastructure, and defensive equities may be the kinds of allocations that could outperform.”
The bottom line
Understanding what stagflation is can help you better understand why policymakers enact certain policies in an attempt to avoid it. It may also help you understand as an individual what you may want to do to adjust should you ever experience a stagflationary period in your lifetime. Consider speaking to a J.P. Morgan advisor if you have questions on how to adapt your current strategy to hedge for potential periods of stagflation.
Frequently asked questions about stagflation
Stagflation creates a policy dilemma for governments because the typical tools to fight a recession (like lowering interest rates or increasing government spending) tend to worsen inflation, while the measures needed to combat inflation (like raising interest rates or reducing spending) typically deepen economic stagnation and unemployment. Governments essentially face a situation where addressing one problem may make the other one worse.
During an inflationary period, the cost for goods and services continually increases. According to the Federal Open Market Committee, a key body within the Federal Reserve System, the ideal inflation rate is 2%. While inflation has a negative connotation, it also usually means that the economy is growing, which is a positive sign.
In inflationary periods, consumers may also see an increase in their pay as salaries may rise to keep up with inflation. On the other hand, the purchasing power of the dollar typically decreases during these periods.
In contrast, deflation is when prices for goods and services decrease. And while that may sound appealing (who doesn’t want to pay less for the same item?), it also generally means that the economy is suffering. For example, during the Great Recession, the country experienced periods of deflation, with an inflation rate reaching negative 2%.
There’s also disinflation, which refers to a decrease in the inflation rate. For example, if the starting inflation rate is 2% and then drops to 1.75%, disinflation is happening. Unlike deflation, disinflation isn’t necessarily considered completely negative – it underscores a slowing economy but not a drop in overall prices.
During the 1970s, the U.S. experienced a period of stagflation that lasted for almost a decade. For U.S. consumers, this period was a turbulent time, complete with high unemployment and high inflation.
The first spark of stagflation occurred when oil prices increased significantly. This rise in oil prices also caused the cost of other goods to increase. Stagflation continued until the early 1980s in the U.S.
Because high unemployment often coincides with a period of stagflation, it’s not a bad idea to beef up your emergency fund. It may also be helpful to keep your resume updated, continue to network with other professionals and prepare for layoffs should they happen.
A stagflationary period may also be a good time to evaluate your finances to see if you can cut your spending in any way.
And even though the stock market may fluctuate greatly during a period of stagflation, continuing to invest may not be a bad thing over the long term.
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Editorial staff, J.P. Morgan Wealth Management
