Stagflation

Stagflation is the combination of persistently high inflation and stagnant economic growth happening at the same time, often accompanied by rising unemployment. It is an unusual pairing, since inflation is more commonly associated with an economy that is running hot, not one that is barely growing.

The term became widely used to describe the US economy during the 1970s, when oil price shocks pushed prices sharply higher at the same time growth stalled and unemployment climbed. It creates a difficult problem for the Federal Reserve, since raising interest rates to fight inflation risks slowing growth even further, while cutting rates to support growth risks pushing inflation even higher, and there is no single tool that fixes both problems at once.

Stagflation is especially painful for investors because it tends to hurt stocks and bonds together. Corporate profit margins get squeezed by rising costs at the same time demand growth is weak, while bond prices fall as inflation erodes the value of their fixed payments, leaving few traditional places to hide.