What is stagflation and what are the signs of its emergence?

What is stagflation and why is it dangerous for the economy?

Stagflation refers to macroeconomic events in which an economic downturn or weak growth is combined with high inflation. The term "stagflation" comes from the merger of two words: stagnation and inflation.

Stagnation is characterized by negative dynamics in economic indicators such as:

A decline in the pace of production of goods and services, followed by stagnation and, accordingly, an economic slowdown;
A lack of GDP growth, a decrease in its growth rate, or even a contraction in GDP;
A rise in unemployment.

Inflation is characterized by such signs as:

rising prices for consumer goods and services;
declining real household incomes;
erosion of savings;
increased business costs for raw materials, logistics, and wages;
a decline in the purchasing power of the national currency.

Thus, the danger of stagflation lies in the fact that it combines macroeconomic problems moving in different directions, making it especially difficult to regulate.

Inflation and stagflation as drivers of demand for Bitcoin and gold

Inflation is characterized by rising prices against the backdrop of a stable or growing economy. This trend is explained by an increase in the overall money supply in the country and the associated growth in demand for consumer goods and services.

In the context of the cryptocurrency market, when inflation accelerates, some investors begin to turn their attention to scarce assets. Thus, in 2020–2021, amid large-scale monetary stimulus and concerns about currency debasement, bitcoin was often viewed as "digital gold" and a potential hedge against inflation:

Reuters noted that this very argument supported the inflow of institutional interest in cryptocurrency, while Tesla disclosed in February 2021 that it had purchased $1.5 billion worth of bitcoin. During the same period, MicroStrategy continued increasing its bitcoin reserves and, by February 2021, already owned approximately 72,000 BTC.

A similar defensive demand has traditionally been seen in the gold market. For example, in August 2020, the price of gold exceeded $2,000 per ounce for the first time: Reuters linked this to investors seeking a store of value amid unprecedented stimulus and fears of accelerating inflation and possible stagflation.

Causes and signs of stagflation

The causes of stagflation can be divided into two categories: global and local.

Global, or external, causes are those that can affect the entire global financial market.

A vivid example of a global cause of stagflation is the 1973 oil price shock. The sharp price increase was caused by the oil embargo imposed by OPEC countries. At that time, the price of oil quadrupled.

A similar situation was observed in late February to March 2026, when the escalation of the conflict between the United States and Iran led to a sharp restriction on shipping through the Strait of Hormuz — a key route through which about one-fifth of global oil and liquefied natural gas supplies pass. Against this backdrop, the market faced a classic supply shock that increased stagflation risks: according to Barclays, if the disruption persists, supply losses could reach 13–14 million barrels per day, and by March 26, Brent had risen above $104 per barrel.

The economic effect of such a shock lies not only in the higher cost of raw materials. Rising oil prices are quickly transmitted into the cost of fuel, logistics, fertilizers, and industrial production, and then into broader consumer price growth and worsening inflation expectations. That is why the OECD (Organisation for Economic Co-operation and Development) has already downgraded its forecast for the global economy in 2026: expected global GDP growth has been reduced to 2.9%, while the inflation forecast for the G20 countries has been raised to 4.0%.

In financial markets, stagflation increases the likelihood of tighter monetary policy. Representatives of the U.S. Federal Reserve have already directly pointed to rising inflation risks from the energy shock, and market expectations have shifted so much that the probability of a key rate cut in the United States in 2026 has declined.

The cryptocurrency market also reacts negatively during periods of stagflation. In late March 2026, bitcoin briefly fell below $69,000, while Ethereum and XRP declined even more sharply, as investors perceived accelerating oil-driven inflation as a factor putting pressure on risky assets.

Local, or internal, factors of stagflation include actions taken by a specific state.

According to experts, one of the key internal causes of stagflation is monetary policy errors. For example, in the 1970s in the United States, the Federal Reserve maintained loose monetary conditions for too long, which intensified inflationary pressure. When the regulator later shifted to sharply raising rates to curb price growth, this led to a decline in business activity, rising unemployment, and the recession of the early 1980s.

In addition, authorities often seek to curb inflation through administrative measures. Thus, in 1971, the Nixon administration introduced a wage and price freeze and an import surcharge. However, such measures produced only a short-term effect and did not eliminate the fundamental causes of rising prices and the risk of stagflation.

How can stagflation affect the economy and the cryptocurrency market?

A vivid example of the effects of stagflation on the economy and the cryptocurrency market is the period of the pandemic that began in March 2020. The self-isolation measures introduced led consumers to start spending their savings en masse, effectively "sweeping" goods off the shelves to build up supplies. Panic buying led to shortages and, in turn, to sharp price increases and higher stagflation risks.

At the same time, demand for high-risk assets such as bitcoin also fell, which led to a sharp withdrawal of liquidity from the cryptocurrency market. For example, in March 2020, amid global panic caused by the pandemic, Bitcoin lost more than 30% of its value in five days, Ethereum fell by 27%, and XRP by 21%. Reuters noted at the time that the sell-off affected the entire spectrum of risky assets and undermined the thesis that bitcoin is a "safe haven."

At the same time, the subsequent dynamics showed the dual nature of the crypto market under conditions of an inflation shock and the threat of stagflation. On the one hand, by the end of 2020, Bitcoin had risen by more than 170%, as some investors began to perceive it as an asset potentially protected against inflation. On the other hand, the March 2020 crash demonstrated that in a phase of acute uncertainty, cryptocurrencies more often behave like high-risk assets rather than as a full-fledged defensive instrument.