Key terms:

What is Core CPI?

The Core Consumer Price Index (CPI) measures the changes in price for consumer goods, except for food and energy.

This measure is used instead of the normal CPI, since it better reflects long-term inflation, as food and energy prices are relatively more volatile.

What is GDP?

Gross Domestic Product (GDP) reflects a country’s ability to produce goods and services.

Based on the GDP growth rate, we can see that GDP shrunk in 1974-75, and again in 1980 and 1982, which matches the high inflation we saw earlier.

The Year 2022 is quite miserable from an economic standpoint. According to the IMF, global economic activity is experiencing a sharper-than-expected slowdown, with a record-breaking inflation rate since decades ago. The ongoing tightening of monetary policies, the Russia-Ukraine War and the lingering Covid-19 pandemic, make the economic outlook dimmer. (IMF, 2022)

Global growth is forecasted to slow from 3.2% in 2022 and 2.7% in 2023. This is the weakest growth profile since 2001, except for the global financial crisis and the acute phase of the Covid-19 pandemic. Low growth, high inflation and high unemployment are early signs of stagflation and it was accurately indicated in the past 1970s Oil Crisis.

Now the question that lingers on us is “What’s the direction of the economy for the next 5 years: are we heading towards stagflation?”


Stagflation is a phenomenon where stagnation (when the economy is not growing) is combined with inflation (when prices rise). Interestingly, people don’t believe in stagflation, even economists in the early 60s, as it was considered a rare economic phenomenon back then. But people’s minds changed in the 1970s, during the time they had to experience the inevitable stagflation. (Statista, 2022)


Stagflation occurs in the existence of slow growth, high unemployment, and high inflation. Economic policymakers have a consensus that stagflation is the most difficult to handle, as efforts to correct one factor can exacerbate another. To illustrate this, governments and central banks can loosen the fiscal and monetary policies to cope with the slow economic growth, but it will certainly lead to an increase in the money supply that further pushes up inflation.

History of Stagflation

The term “Stagflation” was first used by Ian Macleod in 1965, to reference the phenomenon of high inflation and unemployment in the United Kingdom. The terminology was brought up again in the U.S. during the 1970s oil crisis, which caused a recession that was five consecutive quarters of negative GDP growth. At the same time, inflation doubled in 1973 and hit double digits in 1974, and unemployment reached 9% by May 1975.

Stagflation was once thought to be impossible. Mainstream economic theories that dominated academic and policy circles for much of the 20th century tried to exclude it from their models. Essentially, world economics before 1970 was dominated by the infamous economic theory of the Phillips Curve, which developed in Keynesian economics and portrayed macroeconomic policy as a trade-off between unemployment and inflation.

Phillips Curve


Source: Federal Reserve Bank of St. Louis (2020)

The Phillips curve is an economic theory that inflation and unemployment have a stable and inverse relationship. It claims that with economic growth comes inflation, which should lead to more jobs and less unemployment.

In 1958, New Zealand economist Alban William Housego Phillips, also known as William Phillips, found the inverse relationship between unemployment and the rate of change in money wage, which was the archetype for the Phillips Curve.

While in 1960, Richard Lipsey, Paul Samuelson and Robert Solow provided further support for Phillips’ findings, who officially coined the terminology of “Phillips Curve” by linking price inflation (instead of wage inflation) with the unemployment rate. Samuelson and Solow believed they could fine‐tune the economy by choosing a socially optimal point on the Phillips curve, at least in the short run.

Although Samuelson and Solow stated that their analysis pertained to the short run, there was a strong consensus that governments thought the Phillips curve was the permanent tradeoff between inflation and unemployment (ignoring the outliers on the graph above). That belief fostered the idea that mild inflation was beneficial in reducing unemployment. As a result, the inflation rate increased from 1.2% in 1962 to 5.8% in 1970.

With high and variable inflation in the 1970s, reaching 13.5% in 1980, the Phillips curve lost its lustre as both inflation and unemployment soared. After that, the voices questioning the malfunction of the Phillips Curve arise and allow room for stagflation to stand from the economic point of view. However, the Phillips Curve has not been eliminated even today, as Fed Chairman Jerome Powell believes the Phillips Curve “continues to be meaningful for monetary policy” even though the strength of the correlation between unemployment and inflation “has weakened”. (Cato Institution, 2020)


How stagflation happens

The Causes of Stagflation

In the simplest term, stagflation happens when growth is slow or negative, and there is high unemployment and high inflation. The presence of these 3 factors is considered the leading indicator that results in stagflation. The cause of stagflation is complicated and academics are yet to have one concrete theory to explain, hence, the theories below are among the mainstream in explaining the causes of stagflation.

Supply Shock Theory

The supply shock theory posits that stagflation occurs due to a sudden decline in the supply of products and services. This causes prices to increase dramatically, affecting lower profit margins for most companies and ultimately slowing economic growth. For example, if factories suddenly go bust, this would significantly reduce the available products in the market.

Poor Monetary Policies Theory

This theory states that stagflation is often the result of poor monetary policy. It is because the central bank’s and government’s attempt to interfere and regulate the economy will instead worsen a crisis. For instance, the US focused on maximum employment prior to the 1970s, by introducing loose monetary policies such as the Employment Act of 1946, which inadvertently caused inflation to grow and affected the employment market and economic growth.

Government interventions can also cause stagflation, for example, the Nixon strategy of devaluing the dollar instituted wage and price freezes known as the Nixon Shock. But in the end, due to the conflicting objectives between the central banks and legislators who tried to keep inflation in check, this pressed down unemployment and high economic growth at the same time.

Demand-Pull Stagflation Theory

Proposed by economist Eduardo Loyo, the demand-pull stagflation theory suggests that stagflation can occur exclusively from monetary shocks without the need for a supply-related shock. It is most likely to occur when governments tighten monetary policies, such as raising the federal interest rate or a reduction in the money supply.

Cost-Push Stagflation Theory

The cost-push stagflation theory sees supply-side inflation as a key driver of stagflation. In this case, rising prices lead to unemployment since they usually reduce the profit of the companies, which leads to reduced economic output. Supply-side inflation can also be impacted by things like increases in wages or labour shortages.

End of the Gold Standard

Historically, Nixon’s ending of the convertibility of US dollars to gold marked the end of the Bretton Woods System, and it was considered to be one driver of the 1970s stagflation. The gold standard made the US vulnerable in gold runs, as there were more dollars in foreign hands than gold reserves in the US. (In 1966, non-US central banks held $14 billion, while the US had only $13.2 billion in the gold reserve.)

Nixon closed the gold window that allowed for the exchange of dollars for gold in 1971, and US dollars officially decoupled from gold in 1976. Both moves devalued the dollar, which impacted inflation and economic growth and led to stagflation. (IMF, 1971)


The Mechanism of Stagflation


Click Here to View Diagram in Higher Quality


Source: Seeking Alpha (2022)

Stagflation is triggered by a supply shock. A supply shock is an unexpected event that changes the supply of a product or commodity, resulting in a sudden price change. It can be negative, resulting in a decreased supply. Assuming aggregate demand is unchanged, a negative supply shock will cause a price increase in products and services. When the price of goods gets expensive, it decreases the aggregate demand of the economy, which causes the utilisation and production of the economy to slow down. Businesses might experience a decline in profit as demand plummets, and to cut costs to survive, employees get laid off, which causes the unemployment rate to spike. As the unemployment rate increases, wages will decrease due to more people actively searching for work. Also, the lower wages indicate lower disposable income for workers and forces them to spend less, further reducing the aggregate demands of the economy. (Business Insider, 2022)

To sum up, the increasing inflation force came from the supply shock reducing the supply of the economy, while the rising unemployment rate was due to lesser aggregate demand and slowdowns in businesses. Ultimately, the impact is lower economic output, illustrated by stagnant or negative growth in GDP. (Seeking Alpha, 2022)


Example of stagflation in US History 

Stagflation broke the traditional economist’s beliefs, where unemployment and inflation have an inverse relationship.

High Inflation

> Caused by a spike in West Texas Intermediate crude oil, which brought about higher energy costs. (Investopedia, 2022)

The oil crisis of the 1970s is the most frequently used illustration of stagflation. In response to Western backing for Israel during the Yom Kippur War, the Organisation of the Petroleum Exporting Countries (OPEC) imposed an oil shipping embargo on the United States and Israel’s European allies in October 1973.

The rapid rise in oil prices by almost 300% resulted from the oil embargo. That led to significant problems in the country’s car-dependent economy, as oil prices remained high even after the embargo ended in March 1974. This led to a protracted period of stagflation during which high oil prices caused inflation to rise quickly, unemployment to rise, and the economy to stagnate. Manufacturing jobs were being relocated outside of the United States to save on labour costs and the rising cost of the Vietnam War.

Real wages stopped growing as a result of the U.S. economy shifting from manufacturing to lower-paying service jobs, which also affected consumer confidence and spending, aggravating the crisis.

To combat stagflation in the 1970s, President Richard Nixon devalued the dollar and enacted price and pay freezes. Jeremy Siegel, a well-known economist, believes that this plan is among the biggest failures in American macroeconomic policy because it was unsuccessful. The Federal Reserve’s expansion of the money supply, in the opinion of many economists today, was the primary cause of the stagflation crisis of the 1970s.

At the time, it was thought that high inflation resulted in low unemployment, but in the 1970s, both rates climbed. To stop stagflation, the economic policy had to be revised to place more emphasis on low unemployment and price stability. (Seeking Alpha, 2022)

Source: U.S. Bureau of Labor Statistics

High Unemployment (>5%)

The unemployment rate is measured by the number of people actively looking for work, but are not employed. The unemployment rate first spiked in 1975, and again in 1982-83. Throughout 1975-85, although unemployment rates fluctuated, the rate stayed above 5%.



Is the US facing stagflation in 2022?

As we have observed the data for stagflation in the 1970s, let us look at the recent data.

High inflation: ✅ (has fulfilled the criteria)

Based on the graph below, core inflation typically hovers between 1 to 3%.

Source: U.S. Bureau of Labor Statistics

Core inflation hit 6.3% in September 2022, which is among the highest figures we have seen in recent years. Although the core inflation is still lower compared to 1982, it is worrying that it has been abnormal in recent years.

High unemployment: ❌ (has yet to fulfil the criteria)

Source: U.S. Bureau of Labor Statistics

During the Covid-19 pandemic, unemployment in the US spiked to 14.7% in April 2020. Hence, the US government introduced the CARES act, which helped businesses to retain employees.

However, unemployment is supported by government intervention, and would not be sustainable in the long term, once the government stops providing employment assistance.




Low growth: ❌ (has yet to fulfil the criteria)

Source: U.S. Bureau of Labor Statistics

Although the United States GDP fell by 3.4% during the pandemic in FY2020, it quickly recovered in 2021, with a 5.7% GDP growth rate.

However, stimulus packages and inflation are temporarily fueling the US GDP growth, which can be unsustainable. Therefore, we would still need to look into this closely in the following years. (Forbes, 2022)

Based on the analysis above, there is no sufficient evidence to conclude that stagflation is happening in the United States, at least in the near future. (U.S. General Services Administration, 2022)


Is stagflation happening in Malaysia?

Core Inflation: High ✅

Source: Trading Economics

Malaysia’s Core Inflation hit a record high of 4.0% in September 2022. Although it is still lower than the 6.3% faced in the United States, it is showing a worrying uptrend. (Trading Economics, 2022)

The weakening Ringgit and global inflation setting are causing increased inflation in Malaysia.

Unemployment: High but dropping ❌

Source: Trading Economics

Unemployment spiked to >5% when the pandemic hit in 2020, then gradually dropped to 3.7% in August 2022. However, it is still on the higher side compared to the 3-3.5% maintained throughout 2012-2020. (Trading Economics, 2022)

GDP Growth: ❌

Source: Trading Economics

Malaysia’s GDP grows at around 5%. However, the circumstances in the past few years have caused the rate to be unstable. Currently, the GDP growth rate is rapidly increasing, recently hitting 8.9% for Q2 2022. (Trading Economics, 2022)



Responses to Stagflation

It is challenging for both central banks and policymakers to address inflation, because focusing on one component of the issue may have a detrimental effect on another. For instance, raising interest rates raises borrowing costs and decreases demand, which lowers inflation but also slows GDP growth.

1.   Monetarist Responses

The monetary response is known as the most prevalent method taken by central banks around the world. Monetarists combat stagflation by lowering inflation even if doing so results in a temporary rise in unemployment and a slowdown in economic development. Between 1979 and 1984, the UK Conservative administration employed this tactic, which caused a recession.

2.   Supply-Side Responses

To combat cost-push inflation, policies like deregulation and suspending tariffs that help businesses by lowering costs and boosting efficiency could be utilised to enhance aggregate supply. However, because they are national initiatives to address global supply constraints, these methods are frequently disregarded.

3.   Wage Control Responses

If rising wages are the root cause of stagflation, pay controls might be put in place to slow down the rapid wage growth that is driving up prices and eroding corporate margins.

4.   Waiting Responses

Many economists think that doing nothing in the face of stagflation would be the wisest course of action. Stagflation can occasionally go away with time, but attempts to do so may trigger recessions with sharp drops in GDP. (Seeking Alpha, 2022)

In short, the direction of the economy highly depends on how the three indicators play out. As of the current situation, the US is hit with two red flags of slow economic growth and high inflation, while the unemployment rate remains healthy. The scenario is more optimistic for Malaysia, as we have solid GDP growth and a low unemployment rate. Although the concerning factor for Malaysia is still the rising inflation, the problem arises on how soon the inflation will turn around, since the Bank Negara Malaysia (BNM) has risen to 100 basis points OPR from May 2022 to an OPR rate at 2.75%. Last, the market consensus foresees that BNM will continue to raise interest rates in 2023 to cool down inflation as well as managing inflation expectations.



Business Insider (2022) What is stagflation? Understanding the economic phenomenon that stifled growth through the 1970s. Available at: (Accessed: October 26, 2022).

Cato Institution (2020) The Phillips Curve: A Poor Guide for Monetary Policy. Available at: (Accessed: October 26, 2022).

Federal Reserve Bank of St. Louis (2020) What Is the Phillips Curve (and Why Has It Flattened)? Available at: (Accessed: October 26, 2022).

Forbes (2022) Stagflation: Causes And When It Will Come Available at: (Accessed: October 26, 2022).

International Monetary Fund (2022) World Economic Outlook Report October 2022. Available at: (Accessed: October 26, 2022).

International Monetary Fund (1971) Money Matters: An IMF Exhibit — The Importance of Global Cooperation: System in Crisis (1959-1971). Available at: (Accessed: October 26, 2022).

Investopedia (2022) Stagflation in the 1970s. Available at: (Accessed: October 26, 2022).

Seeking Alpha (2022) Stagflation: Definition, Causes & Consequences. Available at: (Accessed: October 26, 2022).

Statista (2022) Stagflation – Statistics & Facts. Available at: (Accessed: October 26, 2022).

The Edge Market (2022). The State of the Nation: Bank Negara may front-load more OPR hikes in 2023 to tackle core inflation. Available at: (Accessed: December 5, 2022).

The New York Times (2022) The Dollar Is Strong. That Is Good for the U.S. but Bad for the World. Available at: (Accessed: October 26, 2022).

Trading Economics (2022) Malaysia Core Inflation Rate. Available at: (Accessed: October 26, 2022).

Trading Economics (2022) Malaysia GDP Annual Growth Rate. Available at: (Accessed: October 26, 2022).

Trading Economics (2022) Malaysia Unemployment Rate. Available at: (Accessed: October 26, 2022).

U.S. Bureau Of Labor Statistics (2022) U.S. Unemployment rate. Available at: (Accessed: October 26, 2022).

U.S. General Services Administration (2022) Consumer Price Index (CPI). Available at: (Accessed: October 26, 2022).


Researchers: Alex Chong and Kok Chun Yik

Reviewers: Nasir Ali and Sherilynn Ng

Editors: Angellina Choo

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