How Stagflation Differs From A Recession

The financial headlines of 2025 have been heavy with three words: tariffs, stagflation and recession. Although the Trump administration has negotiated a tariff deal with China, the levies on imported goods remain higher than a year ago. The U.S. economy will have to adjust—which means stagflation and recession are still on the table.

Let’s break down the differences between stagflation and recession, including how each impacts the workforce, the economy and the middle class.

What Is Stagflation?

Stagflation is an economic cycle marked by high inflation, high unemployment and sluggish economic growth—an uncommon combination of circumstances. Normally, if the economy grows quickly, unemployment declines and prices can rise. Or, if the economy slows, unemployment rises and inflation moderates. It is rare for unemployment to be high while prices are rising.

The last period of stagflation in the U.S. was in the 1970s. It arose from a combination of factors, the most significant being an oil crisis that drove fuel prices higher and prompted rationing. Unhealthy levels of inflation, unemployment and economic growth persisted from 1970 to 1985.

What Is a Recession?

A recession is a prolonged period of negative economic growth, usually at least two quarters or six months. Economic growth is most easily measured by quarterly changes in Gross Domestic Product or GDP. GDP is the value of all produced goods and services.

Rising unemployment, reduced consumer spending, lower business profits and shrinking GDP characterize recessions. Inflation is not a factor in a normal recession because the reduced spending and economic production cannot support rising prices.

Stagflation Vs. Recession

Stagflation features rising prices and slow economic growth, while a recession demonstrates stable prices with negative economic growth.

Stagflation

• Economic growth: Slow
• Unemployment: High
• Inflation: High

Recession

• Economic growth: Negative
• Unemployment: High
• Inflation: Low

The presence of inflation makes stagflation harder to fix than a recession. The Fed can pull levers to stifle inflation, but these same levers slow economic growth. The opposite is also true. The Fed can stimulate the economy, but these actions will encourage inflation. In other words, there is no straightforward solution for controlling inflation while stimulating the economy.

The Fed finally corrected the stagflation that began in the 1970s by prioritizing inflation control. In 1980, the central bank raised the fed funds rate to 20% to combat 12.5% inflation. The U.S. fell sharply into a recession, marked by a 1.8% GDP decline in 1982. In the same year, inflation fell to 3.8%—its lowest level in a decade.

Impact On The Economy

In stagflation periods, the economy can keep growing, but at a slower pace. During a recession, the economy shrinks. Both scenarios can lead to:

1. Loss of consumer confidence.
2. Decline in consumer and business spending.
3. Reduction in business profits and volatility in the stock market.
4. Limited financial opportunity due to a weak job market.

Impact On The Workforce

The U.S. unemployment rate has been below 4.5% since October 2021. The metric spiked to 14.8% in April 2020 during the COVID-19 lockdowns. The steep rise in unemployment coincided with a severe, but short, recession.

A similar pattern occurred in the 2009 recession. U.S. GDP fell 2.58% and unemployment rose to 10%.

In the stagflation era, unemployment peaked at 10.8% during the 1982 recession.

The outcomes of rising unemployment include:

1. Slower salary growth.
2. Fewer opportunities to earn a promotion or move laterally.
3. Less flexible working conditions.
4. Fewer entry-level jobs for college graduates.
5. Loss of income due to layoffs and furloughs.
6. Reduced job security.

Impact On The Middle Class

Pew Research Center defines the U.S. middle class as three-person households earning $61,000 to $183,000 annually. For this group, stagflation can lead to:

1. Higher cost of living. Budgets will be strained, and discretionary spending will decline. Families will take fewer or cheaper vacations and delay major purchases.
2. Lower income. Layoffs, furloughs and a declining business outlook may reduce household income.
3. Higher debt balances. It will be harder to pay down debt in the face of rising interest rates and tighter budgets.
4. Lower savings balances. Some households may have to rely on savings to cover lost income. Investment accounts could lose value.

If stagflation deepens into recession, the chances of income loss increase and the timeline for economic recovery lengthens. Some middle-class households could fall behind on mortgage and car payments, spend their savings and end up in bankruptcy.

Which Is Worse: Stagflation or Recession

Stagflation can be a bigger problem than recession because:

1. High inflation undermines investment returns and budgets, for consumers and businesses. These issues are more difficult to manage when financial opportunity is limited due to a weak economy.
2. Correcting stagflation may require pushing the economy into recession intentionally to control inflation.

The last time stagflation descended on the U.S. economy, the solution was 20% interest rates and a steep recession. Repeating that story would be a worst-case scenario for U.S. households.

Families will struggle to hold their income steady as prices and debt costs rise dramatically. Those who work in cyclical industries, lack ample savings and carry high debt balances are most at risk.