What Is Stagflation and How Can Investors Prepare?
However, many economists believe that our economy has changed since the 1970s and is better protected against the worst of stagflation. The first crisis of 1973 was caused by an Arab oil embargo, while the Iranian revolution caused the second. These back-to-back supply shocks caused oil prices to quadruple during the first crisis and triple during the second. Since energy is an integral part of most industries, this caused prices for general goods to rise and contributed to the high inflation rates. Those supply shocks followed a period of accommodative monetary policy in which the Federal Reserve grew the money supply to encourage economic growth. Meanwhile, global economic growth slowed sharply in the 1970s—a decade marked by two recessions in the US and the lead-up to a third one that began in 1980.
Here’s what you need to know about stagflation, including how it works and how you can prepare for it. When weighing big purchasing decisions—like a car, for example— Haworth recommends considering whether you can defer or delay the purchase of items where prices may be temporarily elevated, he adds. In Australia, we have been fortunate to have all but avoided recessions over the past three decades, famously managing to dodge two quarters of negative growth—the definition of a technical recession—during the GFC. During the COVID-19 outbreak, the economy slipped into a recession briefly, before stimulus packages and historically low interest rates allowed the economy to regain its footing. As recently as November, CommSec chief equities economist, Craig James, told the SMH that the RBA’s revised forecasts of slowing growth and rising unemployment were signs “of stagflation-lite”. While stagflation is quite rare—in recent history, the US and Australia have only experienced one sustained period of stagflation in the 1970s—it’s become a more frequent topic of speculation over the past six months.
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One obstacle in the way of a stagflationary re-rerun is the modern global economy’s significantly reduced dependence on energy to generate growth. Others include the historically large U.S. alpari review budget deficit, interest-rate increases by the Federal Reserve, and modest inflation expectations shaped by decades of low inflation. 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. A decline in the gross domestic product (GDP) and productivity are both indicators of an ailing economy.
What is stagflation, explained — and whether the crisis may return for the first time in 40 years
The Fed has hiked interest rates the most in a single year since the 1980s, and it’s helped send borrowing costs to levels consumers haven’t seen in years. 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. The causes of stagflation during that period remain in dispute, as did the likelihood of a reprise in 2022 amid high energy and food prices, rising interest rates, and persistent supply-chain snags.
- Stagflation isn’t as common as other economic circumstances, but it does happen occasionally.
- In addition to the World Bank, other major global institutions—like Goldman Sachs and BlackRock—have also warned about stagflation risks.
- Economists usually think of a trade-off between inflation and unemployment.
- Whether or not we are headed for another bout of stagflation remains to be seen.
Current Risk of Stagflation
Stagflation is a term used to describe a stagnant economy hampered not only by slow growth but by high inflation as well. While this combination may seem counterintuitive, it proved real during the 1970s and early 1980s when workers in the U.S. and Europe were subjected to high unemployment as well as the loss of purchasing power. Today in America and Europe, unemployment is low and inflation high, suggesting that one indicator of stagflation, high unemployment, is missing.
Jason Furman, a Harvard economist, suggests that flexibility in financial planning is critical, especially given that the Federal Reserve’s monetary policy may still shift as it tries to curb inflation without stifling growth. He estimates stagflation has a 35% chance, though he sees recession as more likely. He’s also concerned that geopolitical conflicts and supply chain issues could worsen economic risks. With these warnings, experts urge creating a balanced financial plan to navigate possible economic challenges. Experts say there is a danger that Central Bank policy drives the economy into stagflation, a combination of slowing growth and stubbornly high inflation. A government-linked think tank warned as much in a report released How to buy empire token on November 13.
As a result of President Nixon’s request for Congress to provide $2.2 billion in emergency aid to Israel during the Yom Kippur War, the Organization of Arab Petroleum Exporting Countries (OAPEC) imposed an oil embargo against the U.S. In response to the embargo, the U.S. stopped importing oil from participating OAPEC countries, and a series of production cuts changed the world oil price, nearly quadrupling from $2.90 to $11.65 per barrel. While the OAPEC lifted the embargo in March of 1974, the higher oil prices remained. 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.
But we’re not already in a period of stagflation now, and McMillan isn’t worried about another one happening—because the economy is fundamentally different today than it was back then. In addition to the World Bank, other major institutions—like Goldman Sachs and BlackRock—have also warned about stagflation risks. And former Fed Chair Ben Bernanke said in May 2022 that the U.S. could be in for a period of stagflation. There are multiple theories about why stagflation occurs put forth by Keynesian, monetarist, and supply-side economists. Productivity measures may be examined collectively across the whole economy, or they may be viewed individually by industry to investigate trends in labor growth, wage levels, and technological improvement.
“Don’t panic and do something foolish, still kind of stay the course,” Bond says. “Australia is not headed for stagflation, perhaps ‘stagflation-lite’. Slow economic growth and persistently higher-than-desired inflation is every central bankers’ nightmare,” he told the masthead.
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