The 1973 Arab oil embargo created a massive price rise and economic dislocation, from Tokyo to Paris to Chicago. During the 1970s period of stagflation, a long bull market in stocks turned into a severe bear market. Stagflation is a 4-letter word on Wall Street because, once it takes hold, it is very difficult to correct. Fiscal and monetary policies aimed at stimulating the economy only exacerbate the inflationary aspect of stagflation. Tight money policies, on the other hand, amplify the stagnating effects of things like high oil prices.
Stagflation can also cause other distortions that put policymakers in a no-win situation.
For instance, one part of the economy can be growing at the same time that another is shrinking. For instance, manufacturing can fall into recession, while the service sector is still growing. This can mean that wages are growing in one sector at that same time they are falling in another. This creates a serious problem for timing any adjustment of the economy. It can even make it difficult for economists to judge what direction the economy is actually going in.