It’s a perplexing situation that defies conventional economic 20+ best forex signals providers in 2024 by success rate! theories, yet it has been a harsh reality faced by some economies. In this blog, we delve into the heart of stagflation, aiming to unravel its complexities and shed light on its implications. Powell didn’t use the exact word, but said President Donald Trump’s on-again, off-again tariffs were “highly likely” to fuel inflation and could slow growth – two things that when combined have historically marked periods of stagflation. Advisory services are provided for a fee by Empower Advisory Group, LLC (EAG). EAG is a registered investment adviser with the Securities and Exchange Commission (SEC) and an indirect subsidiary of Empower Annuity Insurance Company of America. Advisory fees are calculated based upon the amount of assets being managed (as detailed further in the Empower Advisory Group, LLC Form ADV).
“Stagflation is often caused by adverse supply-side shocks, for example a sudden increase in the price of essential commodities” Brochin says. This was the case in the 1970s when world food shortages met increased energy costs. “Stagflation is a serious risk for investors because of its persistence,” says Michael Rosen, chief investment officer and co-founder of Angeles Investments. “That is, stagflation is rarely a transitory event and it erodes portfolio values over time, often marked by years.” Comparatively, the average length of all recessions since World War II is about 10 months. Stagflation is basically like a recession with the added headache of rising prices and costs to service debt.
What Is Stagflation and How Can Investors Prepare?
A recession is an extended period of economic decline, often defined by negative gross domestic product (GDP) growth. In the US, the National Bureau of Economic Research (NBER) decides if the economy is experiencing a recession by examining additional signs like real income, purchasing power, employment levels, industrial output, and retail sales. Recessions are more common than stagflation, and, in fact, are a normal part of an economy’s life cycle. Stagflation, on the other hand, requires high inflation on top of economic decline and high unemployment.
This stagflation-induced shift as it manifested in the case of the United States economy in the 1970s. With higher inflation as well as higher rates of unemployment, the trade-off had worsened. Although your emergency fund isn’t an investment strategy itself, having a cash cushion in case your income sources change can help you stick to your investment plan and avoid taking on debt. Fidelity suggests that after building up a cash buffer of $1,000, you work toward setting aside enough to cover 3 to 6 months’ worth of essential expenses.
Key points to differentiate between stagflation and inflation include the following:
Firms and individuals also would try to shift their investments and their consumption patterns to match their expectations, compounding the problems and leading to higher unemployment. Combine that with inflation, and you get stagflation, which is very much on the minds of policymakers in Washington, D.C. In the 1970s, gold and other precious metals emerged as reliable traditional hedges. Commodities, especially oil amid an embargo, and those with limited supply, performed strongly. In March, U.S. employers added 228,000 jobs, but gains from the previous two months were revised down. The unemployment rate rose from 4.1% to 4.2%, according to the Bureau of Labor Statistics.
Why Is Stagflation Bad for the Economy?
As inflation moderated and growth remained strong through 2024, these probabilities reversed. However, by mid-2025, renewed tariff concerns drove stagflation risk back up and the probability of a soft landing lower. These shifts highlight the potential value of distributional forecasting for policymakers and market participants navigating uncertain macroeconomic conditions. During inflationary periods, certain assets like equities and real estate often perform well as companies can pass on higher costs.
This is because the typical policy responses to fight one problem tend to worsen the other. For example, raising interest rates to combat inflation can slow economic growth and increase unemployment, while lowering rates or increasing government spending to boost growth can fuel inflation. Recessions are often triggered by demand-side factors, and stagflation typically results from supply-side shocks coupled with expansionary monetary policies.
The Difference Between Stagflation and Recession
A period of stagflation is a particular challenge for economists because levers that tend to alleviate inflation could worsen an existing pressure, like rising unemployment. Stagflation is the combination of high inflation, stagnant economic growth, and elevated unemployment. The term stagflation, a portmanteau of “stagnation” and “inflation,” was popularized, and probably coined, by British politician Iain Macleod in the 1960s, during a period of economic distress in the United Kingdom. It gained broader recognition in the 1970s after a series of global economic shocks, particularly the 1973 oil crisis, which disrupted supply chains and led to rising prices and slowing growth. Stagflation challenges traditional economic theories, which suggest that inflation and unemployment are inversely related, as depicted by the Phillips Curve. Inflation is part of stagflation, but high inflation doesn’t necessarily mean there’s stagflation.
- Fed fund futures, as traded on the Chicago Mercantile Exchange (CME), currently see the Fed as cutting their lending rate by a quarter-point three times this year, starting in September.
- Even if growth and inflation were to meet the definition of stagflation over the intermediate term, we do not see conditions as deteriorating as those seen in the 1970s.
- As described in the previous section, stagflation moves the Phillips Curve further to the right on the graph.
- Yet, in 1970s, this classical notion of the trade-off between inflation and unemployment was put aside by the phenomenon of stagflation where high inflation and high unemployment were there simultaneously.
- Those supply shocks followed a period of accommodative monetary policy in which the Federal Reserve grew the money supply to encourage economic growth.
The term gained far wider prominence during the 1970s oil crisis when OPEC’s embargo triggered a dramatic increase in energy prices in the U.S. and Europe. This supply shock drove up production costs across the economy while simultaneously reducing economic output. Amid ongoing trade policy shifts and geopolitical uncertainty, concerns about stagflation have reemerged as a key macroeconomic risk.
Unemployment will rise through 2026
Imagine an economic scenario where inflation is soaring high, economic growth is stagnating, and unemployment remains persistently elevated. Persistent structural imbalances, such as excessive government regulation, rigid labor markets, or a lack of investment in productive sectors, can contribute to stagflation. These imbalances hinder economic growth while amplifying inflationary pressures. The term “stagflation” became popular and gained widespread recognition and usage in the 1970s to describe the economic conditions characterized by a stagnant economy and high inflation rates.
This occurred first because of an embargo stemming from a war between Israel and the Arab states and later as a result of the Islamic revolution in Iran. Diversification doesn’t protect against loss, but it can help you manage risk. If your ideal investment mix is out of whack due to the price growth or fall of assets in your portfolio, it may be time to rebalance.
Supply shock
Keynes explicitly pointed out the relationship between governments printing money and inflation. Macleod used the term again on 7 July 1970, and the media began also to use it, for example in The Economist on 15 August 1970, and Newsweek on 19 March 1973. John Maynard Keynes did not use the term, but some of his work refers to the conditions that most would recognise as stagflation. “The tariff policies and deportations that have been put in place, and the current budget bill being debated in Congress, are predicted to create inflation,” he said. The term hasn’t been used much in the U.S. since the 1970s, but economists, including Fordham’s Giacomo Santangelo, are talking about it again due to several warning signs.
However, global economic expansion sharply decelerated throughout the 1970s, marked by two U.S. recessions and the onset of a third in 1980. This stagflation of the 1970s was marked by soaring oil prices due to oil embargo put by OPEC resulting from geopolitical tensions and supply disruptions. Inflation rates went to double digits while the economy experienced a slow growth and rising unemployment. “After surging in 2020 on government income support for the COVID shock, the U.S. broad money supply is falling for the first time since the late 1940s,” Wieting says. “Headline consumer price increases have already slowed sharply, but it takes two full years for monetary policy actions to be fully felt in consumer prices.” A central bank (such as the Federal Reserve) or other such Institution can raise interest rates to lower levels of inflation.
- High unemployment with high inflation may make it a difficult decision for the Fed to raise rates and possibly worsen unemployment.
- The severity of stagflation can be measured by the “misery index,” a straightforward sum of the inflation and unemployment rates.
- However, historic stagflation lets economists study trends and come up with potential common causes that might indicate stagflation is coming.
- Other ways of improving the supply-side of the economy can be the investment in research and development, promoting entrepreneurship, and subsidising the dying firms.
- This isn’t just an extremely uncomfortable environment to live in— it’s also quite tricky for governments to fix.
- Worryingly, the potential stagflation of the mid-2020s would occur in an economy with much higher debt levels and lower interest rates than in the 1970s, limiting the policy options available to governments and central banks.
Conversely, prioritizing growth through fiscal measures can amplify inflationary pressures. Achieving equilibrium demands a nuanced approach since measures designed to tackle one aspect could aggravate the other. Additionally, the effectiveness of policies hinges on factors such as economic structure, external dynamics, and public sentiment. During this extreme inflation, both bonds and stocks incur losses as a result of subdued stock prices from the lack of growth and the negative impact of high inflation on bonds.