There are a lot of economic terms making headlines lately: tariffs, inflation, and now, stagflation.
It’s a term that was widely used in the 1970s during the oil crisis when many countries — including Canada and the United States — experienced a period of both high joblessness and high inflation.
But stagflation isn't necessarily a precise term with a strict definition.
So, what does stagflation actually mean? And why are we talking about it again now? TD Stories spoke to Leslie Preston, Senior Economist at TD Economics, to learn more.
TD Stories: What is stagflation?
Leslie Preston: The term is an oxymoron in that it combines two typically contradictory ideas: economic stagnation and high inflation. It was a word coined by a politician in the United Kingdom in the 1960s to refer to a period of simultaneously high unemployment — stagnation — and high inflation.
Typically, in a period of stagnation, the economy is weak, and unemployment is high, so consumer spending drops. This typically puts minimal upward pressure on prices, so inflation should remain low. But having high inflation at the same time of stagnation is the opposite of the typical situation, which is why we're hearing this catchy term "stagflation."
TD Stories: What causes stagflation?
LP: There could be a variety of causes of stagflation. One cause is a significant supply shock, such as the global disruption of oil supply that happened in the 1970s. Another supply shock happened during the pandemic, where challenges in global supply chains led to shortages for many goods and prices shot up.
Stagflation can also stem from poor economic policies, such as when a central bank prints excessive amounts of money causing high inflation at the same time as a country is experiencing a weak economy (which is what recently happened in Argentina).
TD Stories: Why are we talking about stagflation today?
LP: The concern is that U.S. President Donald Trump’s tariffs are generally considered by economists to raise inflation but also dampen growth at the same time, pushing economies in a "stagflationary" direction.
We're watching inflation in Canada closely as it's been creeping up a bit in recent months towards 3%. But inflation remains much lower today than it was back in 2022 when it reached 8%.
The unemployment rate has also moved up over the past couple of years, but it's not at a level that would be considered high relative to history. In fact, over the past 40 years, it's still below average. So, the labour market has weakened, but it isn't weak.
The bottom line is no one would consider the environment we're in today comparable to the stagflation that we saw back in the 1970s. We're not experiencing stagflation right now, but we're experiencing an economic shift that is raising inflation and dampening growth, and that's in the direction of stagflation.
TD Stories: How could stagflation affect the health of the economy?
LP: Stagflation can drive up prices for consumers on everyday goods, from food to gas. It also means slower economic growth and more job losses.
With growth slowing and higher unemployment, consumers are likely to be less confident, and have less disposable income to spend, while at the same time, inflation eats into their purchasing power — effectively kicking consumers when they are already down. It makes a bad situation worse.
TD Stories: How could stagflation be managed?
LP: That depends on how it is caused. On the inflation side, typically the Bank of Canada (BoC) tries to help keep inflation low and stable by adjusting its lending rate. If inflation is too high, the BoC usually raises its lending rate to slow growth in the economy and reduce upward pressure on prices.
However, there is little the BoC can do about a supply shock to the economy, which could result from a trade war. So, the central bank has to be nimble: it can't prevent initial increases in prices due to tariffs, but it needs to help make sure price pressures don't become more widespread or lead to higher inflation. Its job is to ensure inflation returns to its 2% target.