Remember when everyone thought inflation was dead?
The 2020s have served us a harsh reminder that some economic monsters never truly disappear—they just hibernate. Stagflation, that peculiar beast combining stagnant growth with rising prices, has clawed its way back into mainstream economic discourse, and frankly, it’s terrifying policymakers worldwide.
What Actually Is Stagflation?
Stagflation breaks the traditional economic rulebook. It’s the economic equivalent of having your cake and eating it too, except the cake tastes awful and costs twice as much as yesterday.
The unholy trinity consists of:
- Stagnant economic growth (or outright recession)
- High unemployment that refuses to budge
- Persistent inflation that keeps climbing
Think of it as economic quicksand—the harder you struggle with conventional policy tools, the deeper you sink.
Recent Global Reality Check: Stagflation’s Modern Comeback
The 2021-2023 Global Squeeze
The COVID-19 pandemic didn’t just disrupt supply chains—it rewrote the economic playbook entirely. Supply chain bottlenecks met unprecedented fiscal stimulus, creating a perfect storm that economists are still trying to understand.
Key recent examples include:
The UK’s 2022 Crisis: Following the mini-budget disaster, Britain experienced classic stagflationary symptoms. Growth stagnated whilst inflation soared past 11%, forcing the Bank of England into an impossible position. Truss’s tenure lasted longer than a lettuce, but the economic damage lingered.
Turkey’s Ongoing Struggle: President Erdoğan’s unconventional monetary policy—cutting interest rates whilst inflation raged—created a textbook stagflationary environment. Turkish citizens watched their purchasing power evaporate whilst economic growth remained anaemic.
Sri Lanka’s Economic Collapse: The island nation experienced devastating stagflation in 2022, with inflation exceeding 50% whilst the economy contracted sharply. The result? Political upheaval and social unrest that toppled the government.
The Economic Mechanics: Why Stagflation Happens
Supply-Side Shocks: The Primary Culprit
Unlike demand-driven inflation, stagflation typically stems from supply-side disruptions. When production costs surge—whether through energy crises, supply chain breakdowns, or geopolitical tensions—businesses face an impossible choice: absorb costs and reduce profits, or pass them on and risk losing customers.
Recent supply-side triggers include:
- Energy price volatility following the Russia-Ukraine conflict
- Semiconductor shortages crippling multiple industries
- Labour market disruptions post-pandemic
- Climate-related agricultural disruptions affecting food prices
The Wage-Price Spiral Trap
When workers demand higher wages to combat rising living costs, businesses often respond by raising prices further. This creates a vicious cycle where expectations become self-fulfilling prophecies.
Societal Impact: When Economics Meets Reality
The Middle-Class Squeeze
Stagflation doesn’t affect everyone equally—it’s particularly brutal for middle-income households who lack the assets to hedge against inflation but earn too much for government assistance.
Real-world consequences include:
- Mortgage stress as interest rates rise to combat inflation
- Career stagnation as companies freeze hiring and promotions
- Retirement anxiety as pension values erode
- Social mobility decline as education and housing become less affordable
Political Ramifications
Stagflation creates fertile ground for political extremism. When traditional economic policies fail, voters often turn to populist solutions that promise simple answers to complex problems.
The 1970s stagflation contributed to significant political shifts across Western democracies—a pattern we’re seeing repeated today.
Stagflation vs. Other Economic Conditions: The Comparison Game
Recession: The Predictable Pain
Traditional recessions follow established patterns—unemployment rises, inflation typically falls, and monetary policy can provide relief through rate cuts. Stagflation offers no such comfort.
Hyperinflation: The Extreme Cousin
Whilst hyperinflation involves runaway price increases, it often occurs during periods of economic activity (albeit unsustainable). Stagflation combines price rises with economic stagnation—arguably worse for long-term prosperity.
Deflation: The Opposite Problem
Japan’s “lost decades” demonstrated deflation’s dangers, but at least falling prices provided some consumer relief. Stagflation offers no such silver lining.
Policy Responses: The Effectiveness Reality Check
Traditional Tools Fall Short
Monetary Policy Dilemma: Raising interest rates to combat inflation risks deepening recession. Lowering rates to stimulate growth risks fuelling further inflation. Central bankers face an impossible balancing act.
Fiscal Policy Constraints: Government spending to boost employment might worsen inflation. Austerity to control prices could deepen stagnation.
What Actually Works?
Supply-Side Solutions: The most effective stagflation responses target underlying supply constraints:
- Infrastructure investment to reduce long-term costs
- Energy diversification to reduce vulnerability to shocks
- Skills training programmes to address labour market mismatches
- Regulatory reform to reduce business costs
Targeted Interventions: Rather than broad-based stimulus, successful policies focus on specific bottlenecks:
- Strategic reserves for critical commodities
- Supply chain diversification initiatives
- Productivity-enhancing technology adoption
The Political Economy Challenge
The most effective stagflation responses require long-term thinking and short-term pain—precisely what democratic politics struggles to deliver. Voters want immediate relief, but sustainable solutions take years to implement.
Current Implications: Where We Stand Today
The New Normal?
Many economists argue we’ve entered a new era of potential stagflationary pressures:
- Deglobalisation trends reducing efficiency gains
- Climate change impacts creating recurring supply shocks
- Demographic shifts constraining labour supply
- Geopolitical tensions fragmenting global supply chains
Early Warning Signs to Watch
Economic indicators that suggest stagflationary risks:
- Core inflation remaining elevated despite economic slowdown
- Productivity growth stagnating or declining
- Labour force participation failing to recover
- Business investment remaining subdued despite low unemployment
The Bottom Line: Preparing for an Uncertain Future
Stagflation isn’t just an economic curiosity from the 1970s—it’s a clear and present danger in our interconnected, vulnerable global economy. The recent global experiences demonstrate that no country is immune when supply chains break down and policy tools prove inadequate.
For individuals, this means:
- Diversifying income sources and skills
- Building emergency reserves beyond traditional savings
- Investing in inflation-resistant assets
- Staying politically engaged in long-term policy solutions
For policymakers, the lesson is clear: prevention beats cure. Building resilient supply chains, maintaining strategic reserves, and investing in productivity-enhancing infrastructure aren’t just nice-to-haves—they’re essential insurance policies against economic catastrophe.
The question isn’t whether we’ll face stagflationary pressures again, but whether we’ll be better prepared when they arrive.