Which economic state is associated with both inflation and stagnant growth?

The economic state characterized by both inflation and stagnant growth is known as stagflation. Stagflation occurs when the economy experiences a simultaneous rise in inflation and a lack of growth, resulting in high unemployment and a decrease in economic output. This situation is particularly complex for policymakers, as the typical tools used to combat inflation, such as raising interest rates, can further suppress economic growth and lead to higher unemployment.

In stagflation, the inflation rate rises while the economy stagnates, defying the traditional economic theory that inflation and unemployment have an inverse relationship (as depicted by the Phillips curve). This condition emerged notably during the 1970s, when oil price shocks led to increased production costs, driving prices up while economic growth slowed.

In contrast, recession refers to a period of declining economic activity, typically characterized by reduced consumer spending and investment but not necessarily paired with inflation. Deflation involves a general decrease in prices, which is the opposite of inflation and does not signal an economy stagnating at the same time. Prosperity indicates a period of economic growth and increasing consumer confidence, which is also not aligned with stagnation. Therefore, stagflation accurately encapsulates the simultaneous occurrence of inflation and stagnant growth.