The Ins and Outs of Stagflation

Hey guys, over the last year we’ve been hearing the word inflation, more than ever, but how familiar are you with the term stagflation? 

A brief history lesson for you, coined in 1965 by British politician Iain Macleod, the term describes the worst of both worlds, joblessness and low economic activity. In the 1970s stagflation reared its head when there was high inflation coupled with a high unemployment rate. Thus the term refers to rising costs of living (inflation), combined with slow economic growth and high unemployment. 

The problem we’re facing right now is that wages are unable to keep up with inflation. Look at how much the Reserve Bank of Australia has raised the cash rate since May of last year, which has only placed further pressure on households to allocate more funds for repayments. 

Now, the reason there has been a comparison to the stagflation of the 70’s recently is due to some parallels of our current economic situation such as an energy crisis, supply chain disruptions and a period of low interest rates. For now however, unemployment in the U.S specifically remains slow and the dollar is still strong. 

Stagflation Vs Recession

Which is worse for the economy? The reason I place the two against each other for comparison is due to the World Bank’s recent warning that global economies were facing the risk of stagflation, if not a recession.

A recession is widely accepted to be two consecutive quarters of negative economic growth. Whilst stagflation is more vague a term as economic growth can be negative or stagnant, however it’s the combination of all the factors such as high inflation (5% or so) and low employment that economists would agree, defines the term. 

The issue is that rates need to rise to dampen inflation but when the economy is already slowing down, this can make the issue worse. Most economists agree with the possibility of a recession at this current time, rather than stagflation. When it comes to the worst of the two, whilst both are bad, stagflation hits harder and lasts longer. Recessions can trigger a sharper rise in unemployment initially but stagflation leads to more permanent rates of unemployment. 

In our previous articles on recession we discussed how a recession, as painful as it is, ultimately is part of an economic cycle. They usually do not last more than a year, nor does the price of all things inflate. 

Stagflation Risks and Consequences

  • Slow economic growth
  • High inflation
  • Impacts affordability for basic essentials
  • Lower wages
  • Potential for businesses to file for bankruptcy
  • Some investors will see lower profit margins
  • International trade can become more expensive, pushing inflation
  • Low consumer confidence

Is stagflation occurring right now? The short answer is that opinions are divided but it is on some economists’ radar. Right now consumer spending remains strong enough to hold stagflation at bay. Thus, if consumer behaviour were to change, then the risk would be greater, however many economists believe that inflation might be at its peak.

Hedging Against Stagflation

The good news is that there are steps you can take to protect yourself and have a cushion. For the everyday consumer, ensuring you pay off your debts is crucial during times of inflation and potential stagflation. Repayments are only going to get higher as the rates rise, therefore if possible, get out of debt as quickly as you can. Speaking of debt, if you currently have any variable rate loans, switch to a fixed rate as soon as possible.

For the investors out there, shifting your investment strategy to options that can weather the storm is a good way to go. Think about investing in something people need, particularly in this current economic climate. This is why alternative assets can provide great returns, particularly those in the green space because they utilise technology that isn’t dependent on products that are in short supply. 

Good luck out there!

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