What does stagflation refer to?

Stagflation refers to a complex economic scenario in which stagnant economic growth coincides with high unemployment and high inflation. This condition presents a significant challenge for policymakers since the traditional tools used to combat inflation (like raising interest rates) can exacerbate unemployment and hinder economic growth, while measures to stimulate the economy (such as lowering interest rates or increasing government spending) may fuel inflation further.

The key aspects of stagflation are the simultaneous presence of inflation (rising prices) and stagnant economic activity, which typically contradicts the expectations of classical economic theory, which would generally associate low unemployment with inflationary pressures. Understanding stagflation helps explain how economies can face crises that defy typical economic solutions, thereby complicating recovery efforts.