Economy and interest rates · updated October 21, 2026
What is stagflation and why is it hard to stop
Stagflation is the worst mix: prices rise fast while the economy stands still or shrinks and unemployment climbs. It is hard to stop because the remedies clash: high interest rates stop inflation, but they hit the economy even harder.
How it works
Usually, high inflation comes with an overheating economy, and a weak economy comes with slowly rising prices. Stagflation breaks that pattern, most often after a cost shock: energy or raw materials suddenly get more expensive, companies pass the costs on in prices, but people buy less. The central bank has to choose between fighting inflation and supporting the economy.
Worked example
The classic example is the US in the 1970s, after the 1973 oil price shock.
Inflation was only brought down in the early 1980s, when the Fed pushed short-term rates above 15%, at the cost of a harsh recession.
Worth knowing
In stagflation, both stocks and bonds usually have hard years. Assets tied directly to prices held up better: commodities, energy, gold.
When stagflation can fool you
Not every high-inflation year is stagflation: in 2021-2022 inflation rose a lot, but unemployment stayed low in most developed countries. The press uses the word loosely: check whether growth is really weak too.
Related terms
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Questions about stagflation
Which investments do well in stagflation?
Historically, commodities, energy and gold held up better than stocks and bonds. It is not a guarantee: each episode was different.
How does an economy get out of stagflation?
Usually through high interest rates that stop inflation, even at the risk of a recession, or when the shock that started it fades (for example, energy getting cheaper).
These explanations are for information only. They are not a recommendation to buy or sell.
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