The Civic Node

Stagflation

5 min read

Definition

Stagflation is the simultaneous occurrence of high inflation and stagnant or declining economic growth (often with rising unemployment). It is the central bank’s nightmare scenario because the Fed’s two primary tools point in opposite directions: fighting inflation requires raising rates (which slows growth and increases unemployment), while supporting employment requires cutting rates (which risks stoking more inflation). The term was coined during the 1970s Great Inflation.

Why It Matters for the Newsletter

Monetary Policy: Stagflation is the outcome Trump’s tariff policy risks creating in 2025–2026. Tariffs raise prices (inflationary), slow trade and production (deflationary/recessionary), and damage business confidence (suppresses investment). The Fed’s dual mandate becomes internally contradictory: fighting inflation means ignoring deteriorating employment and vice versa.

Geopolitics: The 1970s stagflation was triggered by oil shocks — supply-side disruptions that the Fed couldn’t fix with demand-management tools. Tariff-driven stagflation in 2025 has the same structure: the cause is a policy choice (import taxes), not monetary excess. Rate hikes can’t make tariffs cheaper.

Evidence & Examples

The Phillips Curve Breakdown

The core analytical insight from the 1970s: economists believed there was a stable trade-off between inflation and unemployment (the Phillips curve) — lower unemployment required accepting higher inflation and vice versa. Stagflation breaks this model entirely. Supply shocks can produce both high inflation AND high unemployment simultaneously, leaving policymakers no good options. The discovery of this was a major shift in macroeconomic theory. The Great Inflation

Tensions & Counterarguments

  • Tariff inflation may be transient: Powell’s “one-time price effect” framing — if tariffs are a one-time shock, inflation expectations don’t need to be re-anchored, and the Fed can look through it.
  • Not yet stagflation: As of July 2025, unemployment remained low and inflation elevated but not catastrophic. The stagflation scenario is a risk, not yet a fact.
  • Historical differences: 1970s stagflation was partly caused by monetary policy (Arthur Burns, on the standard reading) responding to a genuinely exogenous supply shock (the OPEC oil embargo, which Nixon did not cause). 2025’s risk is structurally different and arguably worse: the supply shock is endogenous — Trump’s tariffs are being created by the same political actor pressuring the Fed to ignore them. The Fed didn’t create this problem and can’t fully fix it, but the political actor demanding rate cuts could end the inflation source unilaterally and chooses not to. This is closer to LBJ vs. William McChesney Martin (a president demanding accommodation of fiscal stimulus he himself chose) than to Nixon vs. Burns. See Fed Independence.
  • Fed Independence — the institutional response to stagflation risk; pressure on the Fed intensifies when the dual mandate is in tension
  • Tariff-Driven Inflation — the specific 2025 mechanism creating stagflation risk
  • War-Driven Inflation — supply-shock inflation from conflict; same analytical structure as tariff-driven inflation
  • Nixon Shock — related 1971 event; monetization and gold abandonment that preceded the Great Inflation

Key Sources

Graph View

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