Stagflation refers to an economic situation in which high inflation occurs simultaneously with rising unemployment. Until the 1970s, economists generally assumed that these two phenomena were mutually exclusive: either an overheating economy would lead to rising prices, or a weak economy would result in unemployment alongside stable prices. This view was disproven in the 1970s, when both developments occurred at the same time. The cause was a fundamental shift in the global economic order after the Second World War, particularly the end of the Bretton Woods system, which had been based on a U.S. trade surplus and the spread of the dollar in Europe and Japan.
When the United States shifted from a surplus to a deficit country at the end of the 1960s, this system collapsed. By devaluing the dollar and deliberately expanding the trade deficit, the U.S. government pursued a strategy in which capital flowed back into the United States from abroad, for example through the purchase of government bonds or investments in real estate and stocks. At the same time, declining real wages and the weakening of trade unions reduced demand, leading to falling investment and rising unemployment, while the devaluation of the dollar fueled inflation. This combination of economic stagnation and rising prices defined the stagflation of that period.
In more recent times, similar developments have emerged again. Measures such as tariffs, a deliberate weakening of the dollar, new financial instruments, and investments in technology are intended to continue attracting capital into the United States. At the same time, rising energy prices are driving inflation, while demand for goods and labor is declining. This once again leads to a simultaneous increase in inflation and unemployment, indicating a return of stagflationary tendencies.