Stagflation is a word coined by economists to describe an economy with high unemployment, inflation, and a slow or stagnant rate of economic growth. Stagflation is something that authorities all over the world aim to avoid at all costs. The population of a country are affected by high rates of inflation and unemployment amid stagflation. High unemployment rates exacerbate a country’s economic downturn, leading the economic growth rate to swing only a single percentage point above or below zero.
Why is stagflation the most severe form of inflation?
Stagflation is a paradox because slow economic growth will almost certainly result in an increase in unemployment, but it should not result in price increases. This is why an increase in unemployment results in a drop in consumer spending power, which is why this phenomena is regarded unfavorable. When you factor in rampant inflation, what money people do have is losing value over timethere is less money to spend, and the value of the money is falling.
When was the worst stagflation?
Stagflation, a combination of stagnation and inflation, was first created in the United Kingdom during a period of high inflation and unemployment. In the 1960s and 1970s, the United Kingdom was hit by a wave of inflation. When inflation soared in the 1960s and 1970s, UK policymakers failed to see that monetary policy had the most important role in keeping inflation under control. Instead, they attempted to respond to the economic crisis with non-monetary strategies and techniques. In the United Kingdom in the 1960s and 1970s, policymakers produced “inaccurate estimations of the degree of excess demand in the economy,” which contributed greatly to the outbreak of inflation.
However, stagflation was not unique to the United Kingdom. From 1973 through 1982, stagflation was prominent in seven major market economies, according to economists. The focus of economists turned from the causes of stagflation to the “determinants of productivity growth and the consequences of real wages on labor demand” after inflation rates began to fall in 1982.
What makes stagflation so dangerous?
Slowdowns in the economy are a natural element of the macroeconomic cycle. When financial speculation becomes out of hand (as it did in the late 1990s with technology stocks and the mid-2000s with the housing market), the market must self-correct. This is normally accomplished through a brief, albeit painful, recession.
However, there is a distinction between a recession and stagflation: Long periods of sluggish economic growth have been accompanied by high inflation rates. Inflation is defined as an increase in the price of goods and services over time, but it may also be defined as a reduction in the purchasing power of money. Inflation can reach two or three percentage points in a typical year. Things might get nasty if the rate of inflation starts to surge above 5% or even 10%.
Stagflation is extremely hazardous because of this. Consider a scenario in which the economy is in freefall and inflation is out of control. Consumers have less money to spend due to rising unemployment. When you factor in inflation, the money they do have is becoming increasingly worthless. Inflation eats away at the value of your monthly paycheck if you’re on a fixed income. Inflation chips away at the value of any money you’ve managed to save. In a gloomy economic context, inflation is a true confidence killer.
Prior to the 1970s, experts believed that a stagnating economy and rising inflation could not coexist. Inflation was a result of economic expansion, according to the economic ideas of famous British economist John Maynard Keynes. It’s all about supply and demand for Keynesians. Prices rise when demand is great, as it is during a growing economy.
What the Keynesians failed to recognize was that there were other major economic forces at work that could drive inflation higher. Take a trip back to the 1970s to get a better understanding of how stagflation works. Continue reading to learn more about this economically gloomy decade marked by oil embargos, brownouts, long queues at gas stations, and astronomical inflation.
Is stagflation a form of hyperinflation?
Fears of stagflation are rising as commodity prices rise in response to the Russia-Ukraine conflict and the prospect of Federal Reserve interest rate hikes.
Commodity price rises are inherently inflationary, and when consumers perceive rising food and gasoline prices, they may delay purchases, slowing growth.
The Federal Reserve’s aggressive interest rate hikes to combat our high inflation could potentially stifle growth.
Does stagflation lead to a downturn?
Concerns about stagflation have grown since Russia’s invasion of Ukraine. The February jobs data may appear to put an end to concerns about rising prices and decreasing growth, but any relief over the economy should be short-lived.
The reaction on Wall Street to the latest jobs report was overwhelmingly favorable, and for good reason. Employers in the United States added 678,000 jobs last month, far more than experts predicted and the greatest hiring since July. The labor force participation rate increased by one percentage point…
What assets perform well in a stagflationary environment?
Nutrien (NTR, $94.99) is a Canadian company that sells crop inputs, services, and solutions. Potash, nitrogen, phosphate, and sulfate goods, as well as finance solutions, crop nutrients, crop protection products, seeds, and merchandising products, are all available from the company. It has 2,000 retail locations across the United States, Canada, South America, and Australia.
Agricultural names, like metals and energy, are among the best equities for stagflation. Fertilizer companies like NTR, which have increased demand and pricing power when food prices rise, are a good way for investors to obtain exposure to this sector. Furthermore, because Russia is a key fertilizer supplier, the present military situation and resulting sanctions are likely to raise prices.
NTR had been on a tear for a while, even before this latest spark. In 2020, the corporation earned 79 cents per share, but in 2021, it earned $6.23 per share. Wall Street analysts expect this trend to continue, with an EPS prediction of $11.32 for 2022, implying an 80% increase.
As a result, the stock receives an A Growth Grade, which is part of the POWR Ratings system’s overall A (Strong Buy) grade.
The stock has an A Sentiment Grade, indicating that it is popular on Wall Street. Ten of the 14 analysts who cover Nutrien have a Strong Buy or Buy rating on the stock, and none have a Sell rating. NTR’s complete POWR Ratings breakdown can be found here.
Key Points
- Volcker is credited with bringing the United States’ high inflation levels of the 1970s and early 1980s to an end while serving as chairman of the Federal Reserve.
- Inflation was high when he became chairman in 1979, peaking at 13.5 percent in 1981. The inflation rate fell to 3.2 percent by 1983, thanks to Volcker and the rest of the board’s efforts.
- In June of 1981, Volcker increased the federal funds rate from 11.2 percent to 20%. During this time, the jobless rate surpassed 10% for the first time.
- During the economic upturn, Volcker elected to implement a policy of preemptive restraint, which raised real interest rates.
- Volcker’s Federal Reserve board garnered some of the biggest political criticisms and protests in the Federal Reserve’s history, despite his level of accomplishment. The demonstrations erupted as a result of the high interest rates’ harmful impact on the building and farming businesses.
Key Terms
- Stagflation is defined as inflation that is accompanied by slow growth, unemployment, or a recession.
- Inflation is defined as a rise in the overall level of prices or the cost of living.
What happens to real estate in a stagflationary environment?
The cost of your down payment does not affect the price of your home; it is determined by the rate of inflation multiplied by the cost of the home. Inflation may have quadrupled the value of your down payment if the house’s worth doubled. You’re paying less than you were when you took out the loan.
How does stagflation affect the economy?
Their stories, however, are intertwined. Regrettably, they don’t always deliver good news at the same time.
There are trade-offs under regular conditions. You can’t have a fast rate of GDP growth and low unemployment without increased inflation. And keeping inflation low usually comes at the expense of a sluggish economy and probably more unemployment.
So there is usually some good news and some bad news. However, there is no good news when it comes to stagflation.
Stagflation occurs when the economy has both economic stagnation and rising inflation. Unemployment will also rise as a result of a faltering economy.
To put it another way, all three macroeconomic indices are declining.
Are we on the verge of stagflation?
According to Bank of America’s latest Global Fund Manager Survey, professional investors are growing increasingly pessimistic about the future, with the majority now predicting that stocks will enter a bear market this year and that the US economy will suffer from stagflation (high inflation and slow economic growth).