Stagflation Trap

An economic condition where an economy experiences simultaneous stagnation (low or negative growth) and high inflation. Policymakers face a dilemma: raising interest rates to combat inflation deepens the economic downturn, while lowering rates to stimulate growth fuels further inflation. This predicament typically stems from supply-side shocks—such as energy crises or geopolitical tensions—rather than excess demand.

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Related principles

• → Links
  Volume-Price Inversion Paradox
• → Links
  Asymmetric Demand Signaling
• ↺ Counters
  Honeymoon Period Law
• ↗ Extends
  Cost-Push Inflation
• → Links
  Supply Constraint Cost Pass-through
• ↺ Counters
  Marginal Signal of Domestic Demand Recovery
• → Links
  Risk-Off Flight to Safety & Safe Haven Currency Attraction
• → Links
  Demand Signal Forward-Signaling
• → Links
  Hidden Cost Externality