High inflation is fairly easy to understand as it’s nearly impossible to ignore. Anytime you drive by a gas station with its prices listed, you’ll be reminded of the impacts of inflation. There’s a way to prep your big purchases, such as homebuying, as well. “Mortgages are great inflation hedges, as you get to repay in watered-down dollars,” Kotlikoff suggests.
- 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.
- “Stagflation is recession accompanied by inflation,” Kotlikoff says.
- The sole, partial exception to this is the lowest point of the 2008 financial crisis—and even then the price decline was confined to energy and transportation prices while overall consumer prices other than energy continued to rise.
- Cooling gasoline prices have helped to take the edge off of inflation, but prices are heating up in key areas of rent, housing and medical care despite 3.75 percentage points of rate hikes so far this year.
- “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.”
Here’s what to know about stagflation and the potential risk it poses to the American economy. Some economists, like Dolar, believe we’re already in a period of stagflation. She noted that the U.S. gross domestic product shrank at an annual rate of 1.4% over the first three months of this year, even as inflation remained historically high. But Harvey disagrees, saying stagflation hasn’t arrived but poses a real threat. Instead, present-day inflation is owed to generous central bank and Congressional policies in response to the pandemic, which flooded the economy with money, spiked demand and exacerbated a supply chain bottleneck, Harvey said.
In the 1970s, the oil shocks provided the backdrop for a rise in structural rates of unemployment as economies adapted to higher energy prices and growth slowed. In America, unemployment stood below 4% on the eve of the pandemic, with inflation also low. That suggests the current rate of unemployment at 3.6% is close to the long-term norm. Central banks in both America and Europe are struggling to deal with inflation.
The Indicator from Planet Money
One theory states that stagflation is caused when a sudden increase in the cost of oil reduces an economy’s productive capacity. The sole, partial exception to this is the lowest point of the 2008 financial crisis—and even then the price decline was confined to energy and transportation prices while overall consumer prices other than energy continued to rise. The term was revived in the U.S. during the 1970s oil crisis, which caused a recession that included five consecutive quarters of negative GDP growth. Even though the economy is growing at a rapid clip, it shows no sign of overheating. Price indexes in the GDP report show inflation continued to ease, with core prices rising at an annual rate of just 2% over the last six months. A person carries shopping bags at a shopping center on the day after Christmas on Dec. 26, 2023 in Glendale, Calif.
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. Since that time, inflation has proved to be persistent even during periods of slow or negative economic growth. In the past 50 years, every declared recession in the U.S. has seen a continuous, year-over-year rise in consumer price levels. The last stagflation in Australia was during the decade of the 1970s when a global oil supply crisis added pressure to many global economies, including Australia’s. During this period, unemployment doubled to 5% (the then-Labor Government of Gough Whitlam prided itself on ‘full employment’ of around 1 to 2%, which governments have since abandoned), inflation rose to 14% and the economy stalled.
This was the case in the 1970s when world food shortages met increased energy costs. Stagnant economic growth is a bit harder to comprehend as it can be less immediately apparent. Stagnation is often defined as a period in which gross domestic product (GDP) is either growing very slowly or declining, says Frank Brochin, chief investment officer of Family Office Practice at The Colony Group. Stagflation occurs when economic growth slows and the unemployment rate spikes. With high inflation right now and negative economic growth in the first quarter of 2022, it’s easy to understand why those fears are popping up. When an economy slows, that leads to fewer jobs and higher unemployment.
Definitions and Examples of Stagflation
Once thought by economists to be impossible, stagflation has occurred repeatedly in the developed world since the 1970s oil crisis. “Right now we’re paying close to $3 for a gallon of unleaded [gasoline] which is really good. But if we’re at $3.50 or $4, that undermines https://bigbostrade.com/ confidence. It undermines purchasing power.” Economists feared that the central bank’s aggressive actions would trigger an economic downturn, as has usually been the case in the past. “Consumers are hanging tough,” said Mark Zandi, chief economist of Moody’s Analytics.
It led economist Arthur Okun to come up with a misery index summing the inflation and unemployment rates, and the name encapsulates how that period of economic history is remembered. And if price increases stay high for long enough, consumers could begin to expect constantly rising prices as the new normal and will change their behavior accordingly, creating a self-fulfilling inflation cycle. Meanwhile, the Russian invasion of Ukraine in February, coming after a year of lower global oil production, has caused a spike in energy prices akin to that of the seventies, Hunter said. In 1980, the Federal Reserve, led by chair Paul Volcker, raised the Fed funds rate to as high as 21%. This led to a painful 16-month recession and spike in the unemployment rate to 10.8%. Considering that stagflation is such an unusual and puzzling condition, there’s no guarantee that such an austerity fix would produce the same results in another stagflationary situation.
What Is Inflation?
Today in America and Europe, unemployment is low and inflation high, suggesting that one indicator of stagflation, high unemployment, is missing. And as in some previous inflationary episodes, there is still a good chance that once the current surge in prices has dissipated, inflation rates will come back to normal, though at a higher overall price level than previously expected. The last major bout of stagflation took place in what is securities trading the 1970s, when an oil shortage sent gas and other related prices soaring as it simultaneously dragged down economic output. But the crisis of the 1970s offers few lessons for the current moment, since the U.S. economy is far less reliant on gas expenditures and foreign oil, Harvey said. On rare occasions, however, high inflation persists even as the economy slows and unemployment rises, resulting in stagflation, she said.
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“It’s the thing that drives the economy into the ground. And that just didn’t happen this time around.” The nation’s gross domestic product — the broadest measure of economic activity — grew at an annual pace of 3.3% in October, November, and December, according to a report Thursday from the Commerce Department. Whether or not we are headed for another bout of stagflation remains to be seen. Even in the absence of that label, 2022 has been a difficult year for investors, both in Australia and overseas.
But even if we don’t have negative GDP numbers, they’re expected to be pretty weak in the second quarter. The Federal Reserve tried to kick-start the economy by pumping more money into it and cutting interest rates. They thought these actions would make it easier for folks to borrow money and spend it, boosting economic growth in the process. 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.
Gold performed well in the 1970s, as it and other precious metals are seen as a traditional hedge. Commodities also performed well, particularly oil (of course, there was an embargo) and other commodities of limited supply. Real estate also served as a good hedge, as it was less correlated to stocks.
It was popularized in the 1970s as a rough measure of the economic distress amid stagflation. Cost-push inflation occurred in 2005 after Hurricane Katrina destroyed gasoline supply lines in the region. The demand for gas did not change but the lack of supply raised the price of gasoline to $5 a gallon. They also seek to understand what’s causing inflation, because inflationary impulses come in several distinct types, each with its own cause and consequences. Three key varieties are demand-pull inflation, cost-push inflation, and wage-price spiral inflation, the latter also known as built-in inflation.