In a situation of stagflation, it becomes difficult to manage the macro economy because, on the one hand, companies and employees are suffering from slow-growing or falling production (which can lead to weaker profits and job losses), whilst prices are rising more quickly which threatens real standard of living and can worsen income and wealth inequalities.

The UK experienced stagflation in the 1970s. The main causes of stagflation in the UK were the oil crisis of 1973 and the Winter of Discontent in 1978-79. The oil crisis led to a sharp increase in the price of oil, which pushed up inflation. The Winter of Discontent was a period of industrial unrest, which led to a decline in economic output.

The UK government responded to stagflation by implementing a number of policies, including:

• Monetary policy: The Bank of England raised interest rates in an attempt to reduce inflation.
• Fiscal policy: The government increased taxes and cut spending in an attempt to reduce the budget deficit.
• Supply-side policies: The government implemented a number of supply-side policies in an attempt to increase economic growth.