What characterizes stagflation?

Stagflation is characterized by a combination of high unemployment and high inflation, which is counterintuitive to traditional economic expectations. Typically, when inflation rises, it is assumed that unemployment would decrease as a result of increased demand for goods and services, leading to more jobs. However, stagflation presents a scenario where these two adverse economic conditions occur simultaneously.

This situation can result from various factors, such as supply shocks or poor economic policy, which can lead to rising prices while simultaneously constraining economic growth and increasing unemployment. It is particularly concerning because traditional monetary and fiscal policies that aim to reduce inflation often exacerbate unemployment, while policies aimed at reducing unemployment can increase inflation. This dual challenge makes stagflation difficult to address and a key area of focus for economists and policymakers.

The attributes of high growth and high inflation, low unemployment and increasing investment, or stable economic growth with low prices do not reflect the reality of stagflation, as they describe different economic conditions that are generally more favorable.