The level of inflation isn’t defined either, but we can assume that it has to be at least above the 2% threshold set by most central banks in advanced economies. In 2022, we are seeing a rise in global inflation due to supply side shocks, rising oil prices and supply chains adjusting to Covid shocks. However, with high inflation, we are also seeing rapid growth (e.g. UK grew 7.1% in 2021) as it recovered from Covid slump.
What Is Stagflation and How Can Investors Prepare?
- The severity of stagflation depends upon the state of the pool of real savings.
- During a recession, policymakers can turn to expansionary monetary and fiscal policies to stimulate the economy, but these same policies exacerbate the inflationary side of stagflation.
- Stagflation refers to the rare and puzzling phenomenon of a recession coinciding with prolonged high inflation.
- “In particular, we believe investors should favor companies with pricing power that are able to pass increased costs to consumers.”
- Once the controls were relaxed, the rapid acceleration of prices led to economic chaos.
It could make sense to buy now rather than wait if prices continue to rise but lackluster economic growth might also weigh on house prices while the high interest rates necessary to combat inflation will mean less favorable borrowing terms. A lot depends on individual circumstances, what rate you’re offered, and how long peak inflation persists. Keynesians believe that if there is a bout of inflation, central banks can slowly guide the economy to a “soft landing” which minimizes unemployment and income losses. Some point to former President Richard Nixon’s policies, which may have led to the recession of 1970—a possible precursor to other periods of stagflation. Nixon put tariffs on imports and froze wages and prices for 90 days in an attempt to prevent prices from rising. Once the controls were relaxed, the rapid acceleration of prices led to economic chaos.
Severe supply constraints and labor shortages during the COVID-19 pandemic pushed inflation as high as 9%. Russia’s invasion of Ukraine and—in a repeat of history—production cuts by OPEC kept oil and fuel prices high. Inflation and unemployment are supposed to have an inverse relationship, making it easier for central banks to manage things by adjusting interest rates. But if this is how the economy is supposed to work, stagflation is a puzzling paradox. And it forces central bankers and policymakers to devise new ways to solve the problem. Most consumers don’t feel there is ‘growth’ of 7.1% because real wages have been squeezed by rising prices.
The traditional Phillips curve suggests there is a trade-off between inflation and unemployment. A period of stagflation will shift the Phillips curve to the right, giving a worse trade-off. Things are, however, not quite the same once money is generated out of “thin air” because of loose central bank policies. Once that happens, it enables an exchange of nothing for something, a diversion of wealth from wealth generators to the holders of the newly generated money. Once, however, individuals learn about the increase in the money supply and assess the implications of this increase, they adjust their bump stocks will become illegal to own starting tuesday conduct accordingly. Consequently, the boost to the economy from the increase in the money supply growth rate disappears.
Persistently rising price levels and falling purchasing power—i.e., inflation—are just normal conditions of good and bad economic times. As a result, prices rise in response to expansionary monetary policy without any corresponding decrease in unemployment, while unemployment rates rise or fall based on real economic shocks to the economy. Supply shocks can also be caused by labor restrictions which reduce output and raise unemployment and wages while causing prices to rise as businesses push the higher costs of labor onto consumers. The COVID-19 pandemic led to a lockdown and a halt in production study for coming to the trade followed by surging demand when restrictions were lifted. Then Russia invaded Ukraine, causing yet more supply chain issues and leading oil prices to spike.
As Roubini points out, private and public debts are much higher than they were in the past, accounting for about 350% of global gross domestic product (GDP). This is changing and a storm is brewing with higher borrowing costs threatening to push leveraged households, companies, financial institutions, and even governments into bankruptcy and default. Economist Nouriel Roubini is convinced that the Federal Reserve and other central banks’ attempts to curb inflation will lead to a hard landing and a grueling stagflationary debt crisis. Stanford economist John Cochrane is hopeful that inflation likely will go away and the risk of stagflation will be averted. Powell compared today’s economy, with both inflation rates and the unemployment rate below 4%, to that of the 1970s, the decade when most economists consider stagflation to have taken root. In 1974, we have an inflation spike of 25%, at the same time, we see negative GDP growth.
Prices rise rather than stay flat or fall and the tools normally used to fix the economy are ineffective. Other factors that contribute to stagflation include high debt, protectionist trade policies, an aging population, geopolitical tensions, climate change, and cyber warfare. Some of these aren’t going away so stagflation could continue to threaten. One topic that’s been making the rounds lately is the prospect that we could be heading toward a period of stagflation. This has only happened once before in the United States, back in the 1970s, and it isn’t a pleasant experience.
In mid-2022, many were saying that the United States had not entered a period of stagflation, but might soon experience one, at least for a short period. In June 2022, Forbes magazine argued that a period of stagflation was likely because economic policymakers would tackle unemployment first, leaving inflation to be dealt with later. One obstacle in the way of a stagflationary re-rerun is the modern global economy’s significantly reduced dependence on energy to generate growth.
It seems like a simple solution—lowering/raising interest rates to stimulate or slow down the economy, as if all the central bank has to Stop out do is flip a switch. It’s generally agreed that the main cause of stagflation is a major supply shock. Things tend to get off-kilter when the supply of food, oil, or something else that’s essential is disrupted and no longer able to meet demand. The situation is often made worse by poor economic policies.Supply shocks lead prices to rise, hurting businesses, consumer finances, and economic growth.
Does stagflation lead to a recession?
The high inflation leaves less scope for policymakers to address growth shortfalls with lower interest rates and higher public spending. During a recession, policymakers can turn to expansionary monetary and fiscal policies to stimulate the economy, but these same policies exacerbate the inflationary side of stagflation. And since inflation is generally experienced by a wider share of the public than job loss, as Steven Wieting, chief investment strategist at Citi Global Wealth Investments, points out, this can lead to a great deal of hurt. “At the same time, inflation reduces the purchasing power of households and consumer confidence declines, further impacting economic growth,” he says. “In such economic conditions, businesses and individuals face difficulties in planning and making investment decisions.” People begin to understand that their previous increase in money purchasing power is dwindling, so they form higher inflation expectations.
Fed chair Jerome Powell: No sign of stagflation in U.S. economy
It was popularized in the 1970s as a rough measure of the economic distress amid stagflation. They also seek to understand what’s causing inflation, because inflationary impulses come in several distinct types, each with its own cause and consequences. Three key varieties are demand-pull inflation, cost-push inflation, and wage-price spiral inflation, the latter also known as built-in inflation. Unfavorable demographic trends caused by an aging population that leaves fewer people in the workforce alongside increased taxes and regulations could cause economic growth to stagnate, Rosen says.
On the one hand, housing prices (and average rent prices) rose on an annualized basis, but many cities and states implemented eviction moratoriums (meaning you couldn’t evict tenants who weren’t able to pay their rent). However, aside from a brief but severe recession due to the pandemic lockdowns in 2020, the economy muddled through, with gross domestic product (GDP) mostly positive and relatively steady. The term stagflation is a portmanteau of the words stagnation and inflation.
Real estate also served as a good hedge, as it was less correlated to stocks. This shows how in the 1970s, the US economy faced a worse trade off- there was higher inflation and higher unemployment. Urbanist and author Jane Jacobs saw the disagreements between economists on the causes of the stagflation of the ‘70s as a misplacement of scholarly focus on the nation rather than the city as the primary economic engine.
The Difference Between Stagflation and Recession
Phillips curve shifting to the right, indicating stagflation (higher inflation and higher unemployment. Mises Wire offers contemporary news and opinion through the lens of Austrian economics and libertarian political economy. In a market economy, a producer exchanges his product for money and then exchanges the received money for the products of other producers. Alternatively, we can say that an exchange of something for something takes place by means of money. Other theories point to monetary factors that may also play a role in stagflation.
