Many people have probably noticed that the economy can be completely unpredictable. There is a phenomenon that is especially difficult to explain with ordinary economic models. When the economy starts to stall, prices don’t fall—they rise. This condition is called stagflation: a simultaneous combination of stagnation and inflation, two enemies that usually do not occur together.

Usually, governments and central banks know how to address each problem separately. If the economy is falling and unemployment is rising, they can lower interest rates and add money to the system. If prices are rocketing, policy needs to be tightened. But when both troubles happen at the same time, the tools start working against each other. Solving one problem means worsening the other. That is why stagflation is such a nightmare for policymakers.

The term appeared in 1965, when a British politician described exactly this situation. Stagflation is a macroeconomic condition with three factors occurring at the same time: slowing or falling growth, high unemployment, and rising prices for goods and services. In a normal economy, growth and inflation move together, especially when employment is increasing. With stagflation, it’s the opposite: growth stalls, while prices accelerate.

What happens to households in such a situation? People see that prices for everything are rising, while incomes either stay the same or fall. This creates incredible pressure on living standards. If stagflation drags on, it can develop into a serious financial or social crisis.

The difference from ordinary inflation is simple: inflation by itself is just rising prices, but it often occurs during economic growth, when wages also rise. In stagflation, prices are rising while earning opportunities shrink. It is an incomparably more painful phenomenon.

Why does stagflation happen in the first place? There can be several reasons, and they depend on the historical context. Often, contradictions between monetary and fiscal policy are to blame: the government raises taxes, reducing demand, while the central bank at the same time adds money to the system. The result is that growth falls and inflation rises.

A second reason is related to the shift to fiat money. After World War II, when countries gave up the gold standard, central banks gained more freedom to create money. This led to the risk of an excessive money supply and persistent inflation without any guarantee of growth.

The third reason—and perhaps the most common—is supply shocks. When the prices of oil or gas suddenly jump, production costs soar. Companies raise prices, consumers spend more on basic goods, and demand for everything else falls. Growth slows down, unemployment rises, but prices continue to creep upward.

How can this be addressed? There is no single recipe. Monetary economists say that first you need to kill inflation, even if it temporarily worsens the situation with jobs. Supply-side economists suggest increasing production, lowering costs, and changing the regulatory burden. Some believe in self-regulation of markets, but that can take years and end up being very expensive.

And how does this affect crypto? Here everything is more complicated. When the economy weakens, people have less money for speculation, including cryptocurrencies. Institutions also reduce risk. If central banks raise rates to fight inflation, that reduces liquidity and puts pressure on volatile assets. On the other hand, high inflation can attract investors to Bitcoin and other assets with limited supply that are viewed as a hedge. But in practice, crypto often falls in sync with stocks, especially in the short term.

A historical example: the 1973 oil crisis. OPEC imposed an embargo after the Yom Kippur War; oil supplies fell, and energy prices soared. Production came to a standstill, supply chains broke down, and prices for consumers surged. At the same time, growth fell and unemployment rose. Central banks tried to stimulate the economy by lowering rates, but inflation continued to grow. The result was a prolonged period of stagflation in the United States, the United Kingdom, and other countries.

In general, stagflation is one of the most unpleasant economic scenarios. Normal policy tools begin to work against each other. Understanding this phenomenon requires looking not at one metric, but at the entire macroeconomic picture: the money supply, interest rates, employment, and the dynamics of supply. It’s rare, but when it happens, it leaves a serious mark and serves as a reminder that the economy does not always follow predictable patterns.