What is stagflation?

Stagflation is the combination of economic stagnation, high inflation, and rising unemployment occurring simultaneously. The word is a portmanteau of stagnation and inflation. It is considered one of the most difficult economic conditions for policymakers to manage because the tools used to fight inflation typically make unemployment worse, and the tools used to stimulate growth typically make inflation worse.

Why stagflation is unusual

Standard economic theory, expressed through the Phillips Curve, describes a trade-off between inflation and unemployment. When unemployment is low, workers have bargaining power, wages rise, and prices follow. When unemployment is high, wage growth slows and price pressure eases. The implication is that high inflation and high unemployment should not coexist: one condition tends to preclude the other.

Stagflation breaks that relationship. It occurs when a supply-side shock pushes prices higher while simultaneously constraining output and employment. The price increase is not driven by excess demand in a tight economy but by a collapse in supply. The result is higher prices and a weaker economy at the same time, a combination the standard monetary policy toolkit is not designed to handle cleanly.

The 1970s: the defining stagflation episode

The most significant stagflation episode in modern economic history occurred in the 1970s, primarily in the United Kingdom and United States. The trigger was the 1973 OPEC oil embargo, which caused energy prices to quadruple in a short period. Because energy is an input into virtually every sector of the economy, the price shock drove up costs across the board while simultaneously reducing real output. Inflation in the UK peaked at over 25 percent in 1975. Unemployment rose sharply through the same period. GDP growth stalled.

The Bank of England and governments of the period faced an impossible choice: raise rates to fight inflation, at the cost of deeper recession and higher unemployment, or cut rates to stimulate growth, at the cost of allowing inflation to become entrenched. The response was inconsistent and the episode lasted most of the decade before Paul Volcker's aggressive tightening in the US in the early 1980s, and similar policies elsewhere, finally broke the inflationary psychology.

Is the UK at risk of stagflation now?

The UK experienced elements of stagflationary pressure in 2022 and 2023. The energy price shock following Russia's invasion of Ukraine drove CPI inflation to 11.1 percent in October 2022. Growth was weak. The economy entered a technical recession in the second half of 2023. This was not classic stagflation in the 1970s sense, partly because the labour market remained unusually tight through the period and unemployment did not rise sharply until later.

As of 2026, the conditions for full stagflation are not in place. Inflation has fallen back towards the Bank of England's 2 percent target. Growth is positive, if thin. Unemployment is rising but from historically low levels. The more accurate description of the current UK position is a slow-growth, post-inflation adjustment rather than stagflation. The risk of a return to stagflationary conditions would require a new supply shock, most likely another energy crisis or a significant escalation in global trade disruption.

What stagflation means for businesses and investors

Stagflation is particularly damaging for businesses because it combines falling real consumer demand with rising input costs. Revenue is under pressure because consumers are squeezed. Cost bases are under pressure because inflation drives up wages, energy, and materials. Profit margins compress from both directions simultaneously. Businesses with strong pricing power, genuine differentiation, or revenue tied to nominal prices rather than volumes are better positioned than those dependent on discretionary consumer spending at fixed price points.

For investors, stagflation historically favours real assets (commodities, property, index-linked bonds) and companies with pricing power over fixed-income investments, whose real returns are eroded by inflation. Equities in aggregate perform poorly in stagflationary environments because the combination of higher discount rates and weaker earnings hits valuations from both sides.

The CPIx, Briefed's composite consumer pressure index, tracks the conditions that precede stagflationary pressure: wage growth relative to inflation, consumer credit stress, and retail demand. The Briefed daily briefing covers the macro data that moves those indicators, weekdays at 6:45am. Free to read.