Stagflation challenged the dominant Keynesian view that inflation and unemployment moved inversely, as suggested by the original Phillips curve. The term is commonly attributed to UK politician Iain Macleod, who used it in a 1965 speech to the House of Commons describing Britain's economic troubles.
The classic episode occurred in the 1970s across most advanced economies. Triggers included the 1973 OPEC oil embargo following the Yom Kippur War, the 1979 oil shock after the Iranian Revolution, the collapse of the Bretton Woods fixed exchange-rate system in 1971, and loose monetary policy in the preceding years. In the United States, inflation peaked above 13% in 1980 while unemployment also rose, producing high "misery index" readings.
Economists generally explain stagflation through two mechanisms:
- Supply shocks: a sudden rise in input costs (notably energy) pushes prices up while reducing output and employment.
- Unanchored inflation expectations: once workers and firms expect persistent inflation, wage–price spirals can continue even as growth weakens. Milton Friedman and Edmund Phelps formalized this via the expectations-augmented Phillips curve in the late 1960s.
Resolving the 1970s stagflation in the US is typically credited to Federal Reserve Chair Paul Volcker, who from 1979 raised the federal funds rate to roughly 20% by 1981, inducing a sharp recession but breaking inflation expectations. The UK under Margaret Thatcher and other economies pursued similar disinflationary policies.
For political researchers, stagflation matters because it reshaped policy orthodoxy: it discredited simple demand-management Keynesianism, elevated central-bank independence and inflation-targeting frameworks, and contributed to the political rise of monetarism and supply-side economics in the 1980s. The term re-entered debate during the 2021–2023 inflation surge following pandemic-era stimulus and the energy price shock after Russia's 2022 invasion of Ukraine, though most economists judged conditions milder than the 1970s.
Example
In the United States during 1979–1980, inflation exceeded 13% while unemployment climbed toward 7%, prompting Fed Chair Paul Volcker to raise interest rates to roughly 20%.