Stagflation vs Recession
Stagflation and Recession are related concepts in AP Economics that students often mix up. Stagflation is the simultaneous combination of stagnant growth, high unemployment, and high inflation. A recession is a significant decline in economic activity lasting more than a few months. Here is how they compare side by side.
It is caused by a leftward shift of short-run aggregate supply, such as a sharp rise in oil prices (a negative supply shock). It is hard for policymakers because fixing unemployment and fixing inflation call for opposite policies. The 1970s U.S. economy is the classic example.
A recession is a period of economic contraction characterized by falling output, rising unemployment, and decreasing income. Recessions are typically identified by a decline in real GDP for at least two consecutive quarters. During a recession, businesses often cut back on production and lay off workers, leading to reduced consumer spending and further economic weakness.
Stagflation vs Recession: Falling Output With and Without Rising Prices
| Stagflation | Recession | |
|---|---|---|
| What has to be true | Weak or falling output, high unemployment and inflation, all at the same time | A significant, broad decline in economic activity lasting more than a few months |
| What the price level does | Rises, often faster than before the trouble started | Inflation usually slows, because weak demand takes pressure off prices |
| Which curve moves in the model | Short-run aggregate supply shifts left while aggregate demand may sit still | Most often aggregate demand shifts left |
| Typical trigger | A jump in input prices such as energy, or a fall in productivity | A collapse in confidence, investment, exports or credit |
| The policy problem | Fighting the inflation deepens the downturn, and fighting the downturn feeds the inflation | One tool addresses both goals, since expansionary policy raises output and employment together |
| Does it imply the other | Not always, since growth can be merely slow rather than negative | Not always, since most downturns arrive with falling inflation |
| Name on the business cycle diagram | No standard phase name | The contraction, running from peak to trough |
The difference is which curve moved, and the price level gives it away
Both outcomes involve falling output, so the price level is the tell. Take an illustrative economy producing 800 billion dollars at a price index of 100. Suppose the cost of imported energy jumps. Production costs rise across almost every industry, short-run aggregate supply shifts left, and the new intersection lands at 760 billion dollars of output with the price index at 106. Output fell 5 percent and prices rose 6 percent in the same period, which is stagflation. Now rerun the same economy with a different shock. Firms turn pessimistic and cancel investment projects, aggregate demand shifts left, and the new intersection lands at 760 billion dollars with the price index at 97. Output fell by the identical 5 percent, but prices fell rather than rose. Same drop in production, opposite movement in the price level, because a different curve did the moving. That is the whole diagnostic. If a question tells you output fell while inflation climbed, it is describing a supply shock and you should shift SRAS. If output and inflation fell together, shift AD. You can move each curve yourself at /sandbox/adas.
One of the two leaves policymakers without a clean move
A demand-driven downturn is unpleasant but tractable. Cutting interest rates or raising government spending pushes aggregate demand back to the right, which raises output and employment while returning prices toward where they were. Both goals point the same direction. A supply shock splits them. Expansionary policy can restore output, but it does so by pushing the price level higher still, on top of the increase the shock already caused. Contractionary policy can bring inflation down, but only by pushing output further below potential and unemployment higher. Whichever lever is pulled, one of the two problems gets worse, which is why episodes of this kind tend to last. The definitions differ in kind as well. A recession is dated from observed behavior, and while a common rule of thumb is two consecutive quarters of falling real GDP, official datings weigh the depth, breadth and duration of the decline together. Stagflation has no dating committee and no threshold. It is a description of three conditions holding at once. The phases and turning points are laid out at /macro/business-cycle.
Frequently asked questions
Is stagflation the same as a recession?
No, stagflation means stagnant output and high unemployment occurring alongside high inflation, while a recession is a sustained broad decline in activity that says nothing about prices. An economy can be in a recession with inflation falling, which is the common case. Stagflation is also possible without an outright recession if growth is merely slow.
What causes stagflation?
Stagflation is usually caused by an adverse supply shock, such as a sharp rise in the price of energy or another widely used input, which shifts short-run aggregate supply left and raises the price level while lowering output. A sustained fall in productivity can do the same. Demand-side shocks cannot produce it, because they move output and prices in the same direction.
Can you have inflation during a recession?
Yes, and that combination is exactly what stagflation names, since a leftward shift of short-run aggregate supply lowers output and raises the price level at the same time. Falling demand normally pulls inflation down during a downturn. It is when the shock comes from the cost side that both problems appear together.
Live AD/AS Model graph. Drag the curves, or open the full version.
Live Business Cycle graph. Drag the curves, or open the full version.
Get AP Econ exam tips in your inbox
Occasional emails with study tips, new interactive graphs, and exam-season reminders. Free, no spam.
No spam. Unsubscribe anytime. Read our privacy policy.
Keep track of what you have studied
A free EconLearn account adds progress tracking, your quiz history, and achievements. Studying here is free either way, and there is nothing to pay for as a student.
Create a free accountAlready have one? Sign in
Last updated