Stagflation

Stagflation describes an economy suffering high inflation and stagnant growth — often with rising unemployment — at the same time. The combination is difficult for policymakers because the usual remedies conflict: raising interest rates to fight inflation weakens growth further, while cutting rates to support activity risks entrenching inflation. The term became widely used after the oil-shock era of the 1970s. For currency markets, stagflation muddies the normal link between data and exchange rates. Strong inflation prints may not strengthen a currency if traders doubt the central bank can hike into a weakening economy. Analysts therefore watch how policymakers communicate their priorities, since the chosen trade-off drives rate expectations.