Stagflation

In plain terms

Normally, when the economy slows, demand falls and inflation eases. But a supply shock, such as a sharp jump in oil prices, can slow growth and push prices up at the same time. The classic example is the US and Europe during the oil crises of the 1970s.

Why it matters

It is the toughest situation for a central bank. Raising rates to fight inflation can deepen the slowdown, while cutting rates to support growth can push prices even higher. When stagflation fears rise, the policy outlook becomes murky and markets tend to get more volatile.

How it connects to markets

• Stocks: shrinking profits plus high rates are usually a bad mix; consumer staples and energy, which can pass on higher prices more easily, often hold up better
• Bonds: inflation keeps yields from falling, so bonds can struggle too
• Gold and commodities: interest tends to grow as a hedge against inflation

Where to check

• Look for slowing GDP and purchasing managers' indexes (PMI) alongside rising consumer prices
• BLS Consumer Price Index