# Stagflation **Stagflation** is high inflation combined with stagnant output and rising unemployment. It is the economy's worst corner, because the usual cure for each problem worsens the other. Raising rates to fight inflation deepens the slump, and stimulating demand to fight the slump feeds inflation. It is the case the Fed's [[Dual Mandate]] handles worst. A [[Supply Shock]], a sudden hit to the economy's capacity to produce, is the classic cause, because it raises prices and cuts output at the same time. The word is credited to the British Conservative MP **Iain Macleod**, who told the House of Commons on **Nov 17, 1965**: "We now have the worst of both worlds… We have a sort of 'stagflation' situation." ## Why it mattered: the 1970s Postwar economics assumed a stable tradeoff between inflation and unemployment, the original [[Phillips Curve]]. The 1970s broke it: average US inflation rose from about 2.5% to about 7% while unemployment rose too. - **1973–74:** the Arab OPEC embargo against the US (October 1973 to March 1974) took oil from $2.90 a barrel to $11.65 by January 1974. Unemployment peaked at **9.0% in May 1975**. See [[OPEC]]. - **1979–80:** the [[Iranian Revolution]] cut Iranian output by 4.8 million barrels a day, and prices surged again. CPI inflation peaked at **14.8% in March 1980**. The [[Misery Index]] (inflation plus unemployment) hit its all-time high of **21.98 in June 1980**. - **The cure:** the [[Volcker Shock]] broke inflation at the cost of the 1981–82 recession, when unemployment reached **10.8% in November and December 1982**. The whole arc is told at [[Great Inflation]], with the Fed chairs at [[Arthur Burns]] and [[Paul Volcker]]. ## Why it matters to this vault Stagflation is the founding economic story of the modern right. The 1970s discredited the Keynesian consensus and opened the door for [[Monetarism]], with [[Milton Friedman]] and Edmund Phelps having predicted the Phillips-curve breakdown. It also opened the door for [[Supply-Side Economics]] and the [[Ronald Reagan]] coalition. Reagan's 1980 campaign ran on the Misery Index that [[Jimmy Carter]] had used against [[Gerald Ford]] four years earlier. The lesson the movement drew, that inflation is a government failure cured by smaller government and a hard-money central bank, still frames every inflation fight. That includes the 2021–22 "Bidenflation" campaign and the 2026 argument over [[Central Bank Independence]]. ## The 2026 debate The [[Iran War 2026]] energy shock revived the word. The case for and against, in verified numbers as of October 2026 (see [[State of the US Economy]]): | Stagflation signal | 2026 reading | 1970s benchmark | |---|---|---| | Headline inflation | CPI **3.4%** (Aug), energy +16.3% y/y | CPI 14.8% (Mar 1980) | | Underlying inflation | Core CPI **2.4%** (falling); core PCE **3.0%** | Broad-based and rising | | Pipeline prices | PPI **5.4%**; ISM prices indexes 74–78 | — | | Output | Real GDP **+2.2%** (Q2), still growing | Contracting in 1974–75, 1980, 1981–82 | | Unemployment | **4.2%**, with hiring nearly stalled (+29K in Sept) | 9.0% (1975); 10.8% (1982) | | Misery Index | **≈7.6** | 21.98 peak | | Policy response | Fed **hiked** to 3.75–4.00% (Sept 16) | Volcker's hikes to break inflation | **The vault's read:** 2026 is a *supply-shock* episode with a cooling labor market, not 1970s stagflation. Output is still growing, unemployment is low, and core inflation is falling. But it has the same structure, a price shock hitting while hiring stalls, and it puts the Fed in the same bind. That is why the word keeps coming up. **What the Fed has said:** the FOMC's Sept 16 statement and Chair [[Kevin Warsh]]'s press conference did not use the word "stagflation." The statement said economic activity "is expanding at a solid pace" and inflation "remains elevated." Warsh said inflation "is too high and has been for too long" while calling the labor market "in good shape." **Why the label matters:** whoever names the episode assigns the blame. "Stagflation" carries the Carter-era political charge, so expect it from whichever side is out of power, and expect the side in power to cite core inflation and GDP instead. This is the measure-switching pattern at [[Indicator Cherry-Picking]]. ## See also - [[Phillips Curve]] · [[Natural Rate of Unemployment]] · [[Supply Shock]] · [[Expectations Channel]] - [[Great Inflation]] · [[Volcker Shock]] · [[Nixon Shock]] · [[Interest Rate Policy Timeline]] - [[Recession]] · [[Misery Index]] · [[Inflation]] · [[State of the US Economy]]