- Stagflation is defined as a time of low economic growth, unemployment, and growing inflation.
- Google searches for the keyword “stagflation” have increased as oil and gas prices have reached new highs.
- Financial markets, according to expert Alberto Gallo, are trapped between fears of stagflation and optimism that the economy will pick up speed.
What is stagflation and what causes it?
Stagflation is defined as a period of poor economic development and relatively high unemploymentor economic stagnationalong with rising prices (i.e. inflation). Stagflation occurs when the money supply expands while the supply of goods and services is restrained.
What is the distinction between stagflation and inflation?
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.
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 should I purchase to combat stagflation?
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.
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.
What caused stagflation in the 1970s?
You may have heard a lot about stagflation in the United States in the 1970s, when energy costs rose due to an OPEC-led embargo, with oil prices tripling from 1973 to 1975. According to Dolar, this resulted in high inflation and recession in nations that imported huge amounts of oil.
How can you get out of a stagflationary situation?
- Stagflation occurs when inflation rises while output falls and unemployment rises.
- Stagflaton is a period when salaries are unable to keep up with rising prices, resulting in real income declines.
- A rise in the price of commodities, such as oil, is a common source of stagflation. After the price of oil tripled in the 1970s, stagflation developed.
- Following the surge in oil prices and the commencement of the global crisis in 2008, there was some stagflation.
- Policymakers have a difficult time dealing with stagflation. The Central Bank, for example, can raise interest rates to lower inflation or lower interest rates to lower unemployment. However, they will be unable to address both inflation and unemployment at the same time.
Causes of stagflation
- The price of oil is rising. A supply-side shock is frequently the source of stagflation. For example, rising commodity prices, such as oil prices, will raise company costs (making transportation more expensive) and move short-term aggregate supply to the left. As a result, inflation rises and GDP falls.
- Trade unions with clout. If trade unions have considerable bargaining power, they may be able to negotiate for greater salaries even while the economy is slowing. Inflation is largely caused by rising salaries.
- Productivity is decreasing. When an economy’s productivity falls, workers become more inefficient, costs rise, and output falls.
- Unemployment is increasing structurally. If established industries collapse, we may see more structural unemployment and decreased output. As a result, even if inflation rises, we may see more unemployment.
- Shocks in supply. In the event that supply chains are disrupted, prices will begin to rise. Unemployment will fall as a result of the supply shock. For example, supply disruptions in the United Kingdom triggered moderate stagflation in 2021.
Moderate stagflation
When inflation rises as the growth rate falls (i.e. the economy grows at a slower pace), this is referred to as stagflation. Higher inflation and negative growth are less destructive. However, it still implies a deterioration in the unemployment-inflation trade-off.
Stagflation and Phillips Curve
According to the classic Phillips curve, there is a trade-off between inflation and unemployment. Stagflation causes the Phillips curve to shift to the right, resulting in a worse trade-off.
Stagflation (greater inflation and higher unemployment) is shown by the Phillips curve shifting to the right.
Stagflation in the 1970s
In 1974, we had a 25% increase in inflation while experiencing negative GDP growth. The increase in oil prices, as well as the end of the Barber Boom, contributed to this.
This illustrates how the US economy faced a tougher trade-off in the 1970s, with higher inflation and unemployment. The Phillips Curve was slanting rightward.
Stagflation in 2010/11
In 2011, inflation in the United Kingdom increased to 5%, but the economy remained in a state of depression, with negative or very poor growth.
- Higher taxes have the effect of increasing inflation while lowering living standards.
Solutions to stagflation
- In general, monetary policy can aim to lower inflation (through higher interest rates) or boost economic growth (via lower interest rates) (cut interest rates). Inflation and recession cannot be solved by monetary policy at the same time.
- Reducing the economy’s reliance on oil is one way to make it less susceptible to stagflation. Stagflation is mostly caused by rising oil costs.
- The only real solution is to boost productivity through supply-side measures, which allows for stronger growth without inflation. Stagflation Solutions can be found here.
- The Central Bank opted to maintain interest rates low (at 0.5 percent) in 2010/11 because they believed that sluggish growth was a bigger problem than modest cost-push inflation.
Misery index
Unemployment plus inflation equals the misery index. Stagflation causes both unemployment and inflation to grow, hence a high misery index implies a stagflationary time. As a result of high unemployment and inflation, the UK had a misery index of around 14 percent in 2012.
Stagflation of the 1970s
The United States saw a substantial surge in inflation in the 1970s as a result of rising oil costs.
As the postwar economic boom stalled, inflation led to a rise in unemployment.
- The Keynesian consensus of the postwar period was questioned. Until the 1970s, the government and the Federal Reserve seemed to be able to control the economic cycle. However, in the 1970s, both unemployment and inflation increased, and it appeared that traditional fiscal and monetary policy could not handle the dual problems.
- The economic issues of the 1970s gave rise to monetarists like Milton Friedman, and in the early 1980s, the UK and US implemented monetarist policies with the primary goal of reducing inflation while ignoring the short-term consequences of unemployment.
A return to Stagflation
Global inflation is expected to rise in 2022 as a result of supply side shocks, rising oil prices, and supply chains reacting to Covid shocks. However, when the economy recovers from the Covid downturn, we are seeing strong growth (e.g., the UK grew 7.1 percent in 2021).
The economic growth figures, on the other hand, are a little deceiving. Because real earnings have been squeezed by rising prices, most consumers do not believe there is 7.1 percent ‘growth.’ As a result, even if economic statistics do not reveal classic stagflation, it may seem like stagflation to many consumers.
Is it true that deflation is worse than inflation?
Important Points to Remember When the price of products and services falls, this is referred to as deflation. Consumers anticipate reduced prices in the future as a result of deflation expectations. As a result, demand falls and growth decreases. Because interest rates can only be decreased to zero, deflation is worse than inflation.