Stagflation challenges the Phillips Curve trade-off. What is its usual primary cause?

💡 Explanation:

Stagflation is the simultaneous occurrence of high inflation, high unemployment, and stagnant economic growth. The traditional short-run Phillips Curve suggests an inverse relationship (trade-off) between inflation and unemployment. Stagflation breaks this relationship, typically caused by an adverse aggregate supply shock (or negative supply shock), such as a sudden, sharp rise in the price of key commodities (e.g., oil). This shock increases production costs (cost-push inflation), shifting the Short-Run Aggregate Supply (SRAS) curve leftward. This simultaneously raises the price level (inflation) and lowers output/employment (stagnation and unemployment).