When economic growth is slow or a recession hits, the Federal Reserve can alter monetary policy to encourage spending in a bid to stimulate sluggish economies, as it did in the wake of the 2008 financial crisis. In a period of stagflation, however, pushing down interest rates to encourage spending will exacerbate inflation, ultimately making matters worse. «After surging in 2020 on government income support for the COVID shock, the U.S. broad money supply is falling for the first time since the late 1940s,» Wieting says. Governments can carefully manage the demand-side tools of the fiscal and monetary policies to mitigate inflationary pressures beginner’s guide to currency trading without unduly stifling economic activity.

What is stagflation?

• As described in the previous section, stagflation moves the Phillips Curve further to the right on the graph.
• Finally, even if the pace of economic growth slows or even contracts—as many people on Wall Street are forecasting—investors should focus on tweaks to their asset allocations rather than wholesale changes.
• 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.
• Inflation and unemployment are supposed to have an inverse relationship, making it easier for central banks to manage things by adjusting interest rates.
• He also imposed a 10% tariff on imports and removed the United States from the Gold Standard.
• He also believes inflation could remain high due to this labor shortage along with the «massive amount of federal debt» plus the U.S.’s dependence on other countries under sanctions for oil and gas, which may keep prices high.

Mortgage rates surged to 7.12 percent as of Oct. 26, the highest since 2002, while home equity lines of credit are at a 14-year high, according to Bankrate data. Together, three economic enemies — rising unemployment and prices along with a slowing economy — combine to form “stagflation,” a major supervillain that hasn’t made its way into the American lexicon since the 1970s and ‘80s. In the 1970s, economist Arthur Okun developed an index to measure stagflation that is calculated by adding the unemployment rate to the annual inflation rate. «That this index is widely referred to as the ‘misery index’ shows how painful stagflation is,» Brochinm says.

Blame Oil Price Shocks

Persistently rising price levels and falling purchasing power—i.e., inflation—are just normal conditions of good and bad economic times. Even before the 1970s, some economists criticized the notion of a stable relationship between inflation and unemployment. They argue that consumers and producers adjust their economic behavior to rising price levels either in reaction to—or in expectation of—monetary policy changes. Generally, a recession occurs when an economy shrinks or contracts and inflation rates are low. In contrast, stagflation occurs similarly to a recession, but inflation rates are high for a prolonged period.

• In other words, prices are rising, and purchasing power doesn’t keep pace.
• Harsh regulation of markets, goods, and labor in an otherwise inflationary environment are cited as the possible cause of stagflation.
• «During a period of stagflation, businesses struggle to grow due to slowing economic activity, and cannot easily reduce costs due to rising input prices,» Brochin says.
• McMillan says that paying attention to both the underlying data and the headlines is important.
• In October 1973, the Organization of Petroleum Exporting Countries (OPEC) issued an embargo against Western countries.
• This fear arose in response to the Fed’s expansionary monetary policy, which had been used as a strategy to respond to the 2008 financial crisis.

Inflation

Consumers, investors and economists alike aren’t just worried about inflation this year — but also that even a recession won’t be able to cure it. «Investors might be tempted to make drastic changes to their portfolios if they are concerned about stagflation, but we continue to believe that diversification and taking a long-term investing approach are key,» Martin says. «We suggest investors stay invested in the market – focusing on investments that are in-line with their risk tolerance and objectives – and focus on high-quality investments.»

What Is Stagflation?

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. Stagflation poses a severe risk to an economy — stunting growth and causing years of hardship for businesses and individuals. For instance, Range trader the Great Inflation lasted nearly two decades, pushing the American economy into a period of constantly changing fiscal and monetary policies and high inflation.

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. Government can use education and training of workers to increase their productivity. This can be time taking yet, output of the firms will increase leading to the increase in real GDP of the country along with fall in the general price level. Other ways of improving the supply-side of the economy can be the investment in research and development, promoting entrepreneurship, and subsidising the dying firms.

The term stagflation combines the words “stagnant” and “inflation.” Its first use is attributed to a British politician in the 1960s. Stagflation refers to an economy characterized by high inflation, low economic growth and high unemployment. In November of 2008, Zimbabwe experienced the second-highest hyperinflation on record, reaching an estimated 79,600,000,000%. This was caused by the federal government printing more money in response to several economic shocks.

While the Federal Reserve initiated a series of interest-rate hikes in a bid to combat inflation, rates remain low. At the same time, how to use options businesses often experience labor disruptions during stagflation, as employees seek higher wages in the face of increasing costs. Here’s what a period of stagflation would mean for businesses and the larger job market.