Stagflation

Stagflation is a stagnant economy and rising prices at the same time — the words stagnation and inflation combined. Normally a weak economy pulls prices down; here both move in the wrong direction together.

That makes it hard to treat. Reviving growth means cutting rates and loosening money, which pushes prices higher; taming prices means raising rates, which weakens growth further. The two policy levers work against each other.

The classic case is the oil shocks of the 1970s. Crude prices surged, driving up production costs and prices, while business activity contracted and growth stalled. This combination typically follows a supply-side shock.

For individuals it is a poor environment for cash and deposits: prices climb while asset values stay flat. The usual responses are holding some assets that move with prices, such as commodities or inflation-linked bonds, and tightening spending.