Stagflation

Origins and Terminology

The term was first used by Iain Macleod in a British House of Commons speech on 17 November 1965. Britain was then experiencing simultaneously high inflation and high unemployment, and Macleod diagnosed: 'We now have the worst of both worlds: not just inflation on the one side or stagnation on the other, but both of them together. We have a sort of "stagflation" situation.' The term gained international currency through The Economist, Newsweek, and other outlets during the 1970s crisis period.

Historical Manifestation: The 1970s

Following the outbreak of the Yom Kippur War in October 1973, OPEC's oil embargo and the quadrupling of oil prices produced classic stagflation across Western economies. In 1974, real GDP growth among the seven major OECD economies turned negative year-on-year while consumer price inflation doubled. The 1979 second oil shock reproduced the pattern. The crisis was compounded by structural factors: the collapse of the Bretton Woods system (1971), downward wage rigidity, and the expansion of welfare-state fiscal commitments.

In the United States, Federal Reserve Chair Paul Volcker suppressed the inflationary side through the 'Volcker shock' of 1979–1983, driving the prime rate into double digits, though unemployment peaked at 10.4% in February 1983. This experience discredited the postwar Keynesian consensus and catalysed the rise of monetarism and supply-side economics.

Theoretical Significance

Stagflation demonstrated that the stable inflation-unemployment trade-off described by the Phillips curve could break down. Milton Friedman and Edmund Phelps argued that once inflation expectations become entrenched, workers and firms incorporate them into wage and price setting, shifting the Phillips curve upward, an insight later incorporated into New Keynesian models.

While stagflation became a core critique of neoclassical-synthesis Keynesianism, Post Keynesians, drawing on Nicholas Kaldor's analysis, argued that a cost-push mechanism combining primary-commodity price shocks, wage struggles, and firms' markup decisions could explain the phenomenon without abandoning the Keynesian framework.

Contemporary Context

In the 2020s, stagflation has returned as a live concern amid post-COVID supply-chain disruptions, the energy and food price surges triggered by the 2022 Russia-Ukraine war, and the inflationary legacy of major-economy monetary expansion. In 2026 South Korean economic discourse, the simultaneous observation of surging producer prices (PPI), rising inflation expectations, and record-low consumer sentiment reproduces the classic stagflationary configuration, making the term a central diagnostic tool.