To combat recession, monetary authorities reduce interest rates to stimulate growth. To fight inflation, they raise rates to reduce growth. But what if they need to do both at the same time?
When economic stagnation and inflation occur simultaneously, tools that ease one problem make the other worse. The 1970s taught us that “stagflation” can be especially hard to combat. For that reason, we should be concerned that changes occurring in our labor force make stagflation significantly more likely than it has been in nearly 40 years.