To understand why, you have to go back to a very simple idea: money does not have just a face value.
A €10 note will always be a €10 note. That is its nominal value. But its real value (what it can buy) changes all the time. When prices rise, that real value falls. In other words, your money buys less. That is what is known as inflation. Nothing mysterious: simply a gradual erosion of purchasing power.

Money also has a price. When an investor lends money, they ask to be paid for it: the interest rate. In theory, this is the price of capital in the economy. The higher the risk, the higher that price climbs. That is why states and companies deemed solid generally borrow more cheaply than fragile businesses or countries whose finances look like a house of cards.

But that return only matters if it exceeds inflation. If your investment yields 2% while prices rise by 3%, you are in fact losing purchasing power. Indeed, the number in the account rises, although its economic value does not.

Above all investors therefore focus on real interest rates, meaning interest rates minus inflation. When that figure slips into negative territory, savings slowly melt away. That helps explain why money then shifts into other assets: equities, property, commodities. Anything but staying still while inflation nibbles away.

The other central variable is economic growth. It is generally measured by GDP, in other words the wealth produced by a country. When growth outpaces inflation, the economy becomes genuinely richer: output rises, incomes increase, purchasing power keeps pace.

Imbalances that are hard to correct

Things get more complicated when inflation outstrips growth. In that case, real wealth shrinks. Household budgets tighten, businesses see their costs rise, and the economy starts to stall.
That is precisely the cocktail described by stagflation: prices rising while the economy grinds along. Consumption slows, investment falls and unemployment often ends up rising. Nothing very cheerful.

For central banks, the problem is even more delicate. In normal times, faced with a slowdown, they cut rates to support activity. However, if inflation is already high, that amounts to throwing oil on the fire. Conversely, raising rates to cool inflation risks choking an economy that is already fragile.
In short, it's a dilemma.
When prices rise but wealth no longer grows, the economy enters a zone of tension that is often difficult to escape. That is why markets prick up their ears as soon as the word stagflation is uttered, even if its last manifestation dates back to the oil shocks of 1973 and 1979.