For even the best-run companies, an economic downturn can significantly affect revenue and profits — and may ultimately mean the difference between success and failure. The terms recession and stagflation both describe situations in which economic conditions are declining. While recessions are relatively common, stagflation is a much rarer — yet potentially even more damaging — economic state. Here’s how to understand the differences between them.
- Stagflation and recession both describe declining economic conditions with negative business impacts.
- Stagflation is a period of stagnant economic growth combined with high inflation and high unemployment.
- A recession is a period during which the economy shrinks; it is commonly defined as two successive quarters of declining gross domestic product (GDP).
- Stagflation is rare but can be persistent with devastating effects; in the U.S., it occurred from the 1970s to the early 1980s.
- Recessions occur periodically as part of typical economic cycles of expansion followed by contraction. The U.S. has experienced a dozen recessions since 1945, averaging less than a year each.
What Is Stagflation?
Stagflation is a rare economic condition that combines stagnant economic growth with high inflation and high unemployment. The circumstances can be devastating for many businesses and consumers.
The term stagflation — a blend of “stagnation” and “inflation” — was coined in the U.K. in 1965 and came into widespread use in the U.S. during the 1970s, when stagflationary conditions persisted. Previously, economists had thought that high unemployment and high inflation were unlikely to occur together because they usually trend in opposite directions. When unemployment rises, prices typically decline or at least grow more slowly because demand decreases. But during the 1970s, the U.S. and some other advanced economies experienced a perpetual cycle of spiraling prices and wages while economic output sagged and unemployment soared. Inflation climbed from about 1% in the mid-1960s to more than 14% in 1980. Economists don’t all agree on exactly what causes stagflation, though they commonly cite two factors: supply shocks — such as price increases in widely used commodities — and fiscal policies that greatly increase the money supply. The quadrupling of oil prices during the early 1970s is considered a major factor in triggering the stagflation of that period.
The 1970s stagflation era included several recessions — times when the economy shrank — as well as periods of anemic economic growth. It ended when the U.S. Federal Reserve, the nation’s central bank, aggressively raised interest rates to curb inflation. This temporarily drove the economy into a recession but ultimately led to lower inflation and unemployment and more stable long-term growth.
What Is Recession?
In contrast to stagflation, which is a rare economic condition, a recession is a recurring feature of many economies worldwide. Though countries generally aim to spur steady economic growth, in practice their economies go through cycles, enjoying substantial periods of expansion that eventually end and are followed by contractions, otherwise known as recessions. The U.S. has experienced a dozen recessions since 1945, averaging less than a year each. Recessions are usually much shorter than the expansions that precede and follow them; expansions can continue for 10 years or more. Worldwide, more than 120 recessions occurred in advanced economies between 1960 and 2007, usually resulting in a decline in gross domestic product (GDP) of about 2%. An extremely deep and lengthy recession is known as a depression.
The most common definition of a recession is two consecutive quarters of shrinking GDP. However, the National Bureau of Economic Research (NBER), a nonpartisan organization that conducts economic research, uses a more complex set of criteria. It defines a recession as a significant decline in economic activity that’s spread across the economy and lasts more than a few months. To define the start and end of a recession, the NBER examines multiple economic indicators, including personal income, employment, industrial production, and wholesale-retail sales, as well as GDP.
Recessions are generally triggered by specific events or conditions. Those conditions can include economic shocks, such as spikes in the prices of widely used goods, sharp interest rate increases, or a financial bubble like the real estate price bubble that collapsed and initiated the Great Recession, which started in December 2007 and lasted 18 months. Other unforeseen events can cause recessions, too: The COVID-19 pandemic caused a shutdown of large segments of the U.S. economy, resulting in a 2020 recession that lasted just two months, the shortest in U.S. history.
Stagflation vs. Recession: What’s the Difference?
Though stagflation and recession both describe periods of poor economic performance, there are many differences between them. For one thing, recessions are economic contractions that are common, regularly occurring before or after growth cycles, while stagflation is a rare combination of stalling economic growth, rising prices, and high unemployment. Stagflation and recessions typically have different causes and durations as well.
The accompanying chart outlines the most important differences.
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Though recessions are unpleasant for most businesses and consumers, they are a natural part of the economic cycle in many countries, which undergo lengthy periods of expansion followed by shorter contractions. Stagflation, in contrast, is a rare but painful combination of low growth, high inflation, and high unemployment. Stagflation persisted for years in the U.S. during the 1970s and early 1980s.
Stagflation vs. Recession FAQs
Does stagflation mean recession?
No, but periods of recession can occur during a multiyear stretch of stagflation. Stagflation is a combination of stagnant economic growth together with high unemployment and high inflation. It can include years during which the economy grows slowly, as well as periods during which the economy shrinks. A temporary period of significant economic decline is a recession.
What is the difference between stagflation and stagnation?
Stagnation means economic growth is persistently slow, nonexistent, or even negative. Stagflation describes a specific economic situation in which stagnant growth is accompanied by high inflation and high unemployment.
What's the difference between stagflation and inflation?
Inflation is a decrease in the purchasing power of money due to rising prices of goods and services in an economy. Moderate and steady inflation is considered a normal and healthy condition for most economies, but more significant inflation spikes can be problematic. Stagflation is a particularly challenging economic situation that combines poor economic growth with high inflation and high unemployment.