Stagflation Explained
Stagflation is the uncomfortable combination of high inflation, slow or shrinking economic growth, and rising unemployment. It is hard to fix because the usual remedy for one problem tends to worsen the other. The United States lived through a long bout of it in the 1970s, a decade in which gold's dollar price rose many times over after the end of the gold-dollar link. That history is instructive, but it does not mean any future episode would play out the same way.
What Makes Stagflation Different
In a typical slowdown, demand weakens, unemployment rises, and inflation tends to cool. In a typical boom, demand is strong, jobs are plentiful, and prices may heat up. Stagflation breaks that pattern: prices keep rising even as the economy stalls. The term is often credited to British politician Iain Macleod, who used it in the mid-1960s.
The policy dilemma is real. If a central bank raises interest rates to fight inflation, it may deepen the slowdown and push unemployment higher. If it cuts rates to support growth, it may feed inflation. The Federal Reserve's own explanation of its dual mandate, maximum employment and stable prices, is on its monetary policy page.
The 1970s: A Timeline
- August 1971. President Nixon ended the convertibility of dollars into gold for foreign governments and imposed wage and price controls, as described by Federal Reserve History. The Bretton Woods system, established in 1944, effectively came apart.
- 1973–1974. The Arab oil embargo sent energy prices sharply higher. The NBER dates a recession from November 1973 to March 1975, while CPI inflation reached double digits.
- Mid-1970s. Unemployment climbed while inflation, though it eased somewhat, stayed well above earlier norms.
- 1979. The Iranian revolution triggered a second oil shock. Paul Volcker became Fed chair in August and soon shifted policy aggressively toward fighting inflation.
- 1980–1982. Very high interest rates helped bring inflation down, but at a cost: the NBER dates recessions in 1980 and from July 1981 to November 1982, and unemployment rose to its highest level since the Great Depression era.
You can chart CPI, unemployment, and the federal funds rate over this period on FRED from the Federal Reserve Bank of St. Louis.
How Gold Behaved Then
Gold had been fixed at $35 an ounce since the Gold Reserve Act of 1934. Once convertibility ended in 1971, gold's price was free to float, and it rose dramatically through the decade. It was not a straight line, though:
- Gold climbed strongly in 1972–1974 as inflation and the oil shock took hold.
- It then fell by roughly half between late 1974 and mid-1976, even though inflation remained elevated.
- It rose steeply again from 1977, peaking in January 1980 amid the second oil shock, high inflation, and geopolitical tension.
- After that peak, as the Fed's high rates took effect and inflation fell, gold declined and spent most of the next two decades well below its 1980 high.
Historical gold prices are available from the LBMA. Our gold price history page covers this period in more detail.
Lessons, With Caveats
The 1970s are often cited by people who hold gold as a potential hedge against stagflation. There are reasons for caution in drawing direct lessons:
- A one-time shift. Part of gold's 1970s rise reflected the end of a fixed official price. That transition cannot happen again in the same way.
- Volatility along the way. Someone who bought in late 1974 saw a steep loss before the next rise.
- Timing mattered. Buyers near the 1980 peak waited a very long time to recover in real terms.
- Different conditions today. The structure of the economy, energy markets, and central bank practices have all changed since then.
So gold may help some households diversify against an inflationary slowdown, but history offers a pattern, not a promise. Our pages on gold and inflation, gold during recessions, and gold and interest rates each look at one piece of the puzzle.
What Other Assets Did
Stagflation was difficult for many traditional holdings. Fixed-rate bonds lost real value as inflation outpaced their coupons. Stocks struggled in real terms for much of the decade. Cash earned rising interest rates but often still trailed inflation. Inflation-indexed Treasury securities did not exist yet in the U.S.; they were introduced in 1997 (see gold vs TIPS).
Thinking About Your Own Plan
No one can say whether or when stagflation might return. Rather than reacting to headlines, many people build a diversified mix designed to hold up across different conditions, which for some includes a portion in physical metals. A licensed financial professional can help you consider how that might fit your situation.
If you want to learn more about physical metals, Goldco is a precious metals company that offers gold and silver for direct purchase and self-directed retirement accounts. Its precious metals specialists can explain its process but are not licensed to give financial, legal, or tax advice. See our Goldco review.
Frequently Asked Questions
What causes stagflation?
Common explanations include supply shocks, such as a sharp jump in oil prices, combined with loose monetary policy and rising inflation expectations. Economists still debate the relative weight of each in the 1970s.
Did gold rise during the 1970s stagflation?
Yes, substantially over the decade, though with a steep drop in 1975–1976. Part of the rise reflected the end of the fixed official price.
Is stagflation the same as a recession?
No. A recession is a broad decline in economic activity. Stagflation is a recession or slowdown that comes with high inflation.
How did the 1970s stagflation end?
The Federal Reserve under Paul Volcker raised interest rates sharply around 1979–1981, which helped bring inflation down at the cost of deep recessions.