Stagflation refers to a situation where an economy going through stagnation in economic activity and an increase in inflation simultaneously. This situation is seemingly contradictory, as there is low economic activity going on accompanied by high levels of inflation.

Note: Stagnations occur when an economies experience prolonged periods of little economic growth. Typically, economic growth of less than 3% per year is considered to be stagnation.

Inflation is a measure of the rate at which price levels increase over time. Inflation explains why a unit of currency effectively purchases less goods and services with time.

When there is stagflation, price levels rise and the GDS falls.