What it is
Stagflation describes an unusual and challenging economic environment where inflation, or the general increase in prices, persists alongside stagnant economic output and rising joblessness. It combines the problems of inflation (eroding purchasing power) and recession (declining economic activity and employment) into a difficult dilemma for policymakers. This scenario defies traditional economic models where high unemployment usually cools inflation.
In markets, stagflation concerns often emerge during supply shocks, like oil price surges, or when central banks struggle to manage both inflation and growth. Investors might shift to inflation-protected assets like TIPS or gold, while equities can face headwinds from lower corporate earnings and higher input costs. Policymakers find it hard to address because actions to curb inflation (like rate hikes) can worsen unemployment, and actions to boost growth can fuel inflation.
Why it matters
Stagflation can significantly erode investment returns and purchasing power. Understanding it helps investors prepare portfolios for challenging economic conditions.
Reviewed under editorial standardsUpdated September 26, 2026Not investment advice