See Why the Oil Shock Probably Won’t Derail the Economy. And One Way It Might: The U.S. is a net petroleum exporter and productivity is improving, but the bigger risk is stubborn inflation by Greg Ip of The WSJ.
Stagflation combines the words stagnation and inflation. If oil prices rise, supply shifts to the left because the price of a resource has increased. Then prices increase and quantity decreases (which is the stagnation).
We had stagflation from 1975-83. The average unemployment rate was 7.7% and the average inflation rate was 7.8% during that 9 year period. The unemployment rate for 2025 was 4.3% and the inflation rate was 2.7%.
I hope Mr. Ip is right. Excerpts:
"The economy has grown more resilient to oil shocks, and a productivity renaissance is under way, helped by artificial intelligence. Both should help sustain growth and cushion cost pressures."
"The U.S. consumed 4% less gasoline in 2025 than in 2007, while producing 42% more goods and services (as measured by gross domestic product, adjusted for inflation). The share of households’ consumption of energy, including electricity, natural gas and gasoline, fell from 5.7% in 2007 to 3.7% last year."
"the shale revolution has turned the U.S. into a net exporter of petroleum and major exporter of liquefied natural gas. That means the hit to consumers is offset by a boost to producers."
"Russia’s invasion of Ukraine in 2022, which at one point pushed up oil by $45 a barrel, only trimmed U.S. growth by 0.13 percentage point that year, while raising inflation half a point"
"Employment growth has been sluggish for a year, due less to weaker demand for workers than a shrunken supply as immigration dries up."
"last year . . . output per hour worked, i.e. productivity, rose 2.8%."
"Hourly compensation rose 4.1% last year, yet adjusted for productivity, business labor costs were up just 1.3%."
"Stagflation happened in the 1970s not just because of high oil prices and lower productivity, but because the Fed systematically raised rates too little or cut too much, partly because of political pressure." [those Fed actions meant too much demand and that means inflation]
