Stagflation: What It Is, Causes, Expert Views

What Is Stagflation and What Causes It?

By Matthew Frankel, CFP – Updated Mar 11, 2025 at 9:35 AM

Key Points

Stagflation combines high inflation with slow economic growth and rising unemployment.
Raising interest rates to control inflation can increase unemployment, complicating policy decisions.
Persistent stagflation can force severe interest rate hikes, negatively impacting economic activity.

Stagflation is a term that comes from the words "stagnation" and "inflation." It is used to describe elevated inflation that is accompanied by slowing economic growth and high unemployment.

As an example, in 2008 unemployment spiked to 10% as a result of the financial crisis in the United States, but inflation was above 5% for much of that year and the economy was clearly in a recession.

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A graph outlining three causes of stagflation: slowed economic growth, increased inflation and increased unemployment. — Image source: The Motley Fool.

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Law of Supply and Demand

The law of supply and demand is an economic theory asserting that supply and demand will meet each other at a certain equilibrium price.

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Academic views on stagflation

The bottom line

High inflation isn't fun. Neither is high unemployment or stagnant economic growth. But when all of these things happen at the same time, it creates a particularly scary economic situation that leaves policymakers with some difficult choices. In stagflation environments, the Federal Reserve might be forced to raise interest rates to the point where it severely harms economic activity just to avoid hyperinflation.

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About the Author

Matt Frankel, CFP, is a contributing Motley Fool stock market analyst and personal finance expert covering financial stocks, REITs, SPACs, and personal finance. Prior to The Motley Fool, Matt taught high school and college mathematics. He holds a bachelor’s degree in physics from the University of South Carolina, a master’s degree in mathematics from Nova Southeastern University, and a graduate certificate in financial planning from Florida State University. He won a SABEW award for coverage of the 2017 Tax Cuts and Jobs Act. He is also regularly interviewed by Cheddar, The National Desk, and other TV networks and publications for his financial, stock market, and investing expertise.

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