Stagflation

Question:  What is stagflation?

Answer:  The term “stagflation” is attributed to Iain Macleod, a British politician who coined the term while referring to the phenomenon of inflation and stagnation taking place together. Stagflation occurs when there is weak economic growth, rising unemployment, and high inflation. The classic definition is a period when inflation rates exceed that of the gross domestic product (GDP).

The last time we saw this type of environment was in the 1970s and early 1980s when we were faced with lackluster growth, high inflation, and unseemly unemployment rates. During the oil crisis of the 1970s there were five quarters of negative GDP, a doubling of the inflation rate, and sustained high unemployment rates. The economic shock of oil shortages, rising prices and the removal of limits on monetary expansion when President Nixon removed the gold standard all   contributed to slowed growth, high inflation, and high unemployment.

The three characteristics of stagflation are brought along by slowed economic growth, high unemployment, and rising prices, all which are unfavorable for consumers and businesses. At the moment, we have inflation, yet the economic growth and employment levels do not support stagflation.

Increased productivity, often brought about by technological advancements, can be a remedy for stagflation and inflation. There is no denying that in today’s inflationary environment, consumer’s money has less purchasing power yet there are several reasons why we don’t have expectations of stagflation.

Economic growth remains healthy as measured by Gross Domestic Product (GDP). GDP is the total value of all goods and services produced within our borders and a measurement of the country’s economic health. Forecasters at the Federal Reserve Bank of Philadelphia predict that real GDP will be 3.7% this year, 2.7% in 2023, and 2.3% in 2024. Demand isn’t the problem; supply constraints are the primary issue. The effects of the pandemic are obvious making it easy to see why the reversion to the mean and watching trends are important. 

With the unemployment rate at 3.7% and many employers raising wages, this factor is not causing stagflation. Personal income rose 6.0% this past year and spending is up 13.7% for the same time. It should be noted that these statistics from the Bureau of Economic Analysis (BEA) are currently a bit misleading because the last and the largest Federal stimulus checks were sent out in March 2021 causing incomes and consumption figures to post at larger levels.

No matter how inflation is measured, it is too high. In February, the Consumer Price Index rose to 7.90% as reported by The Bureau of Labor Statistics (BLS). It is widely thought that sticky inflationary pressures could deaccelerate as we move into next year and supply chain constraint issues ease.

As we ease out of the COVID related shutdowns and conclude related stimulus funding, the trends in spending and income numbers no longer influenced by the pandemic will be valuable input in gauging the direction of our economy.

Stagflation took place during the 1970s when unemployment and inflation were high, and growth was stalled. This isn’t the case today as we see low unemployment, healthy growth, yet inflation is indeed problematic. The thoughts are that the pandemic stimulus and constraints contributed to inflation. And in the near-term, the Russia/Ukraine war is also adding to inflation, especially to that of gas prices.

The good news is that current environment economic growth remains healthy, demand is strong, supply constraints are improving, and unemployment has fallen from its peak. Low unemployment eases the worry of wage stagnation, and in many cases, we’re seeing wage growth.

Inflation is a far greater concern than rising interest rates, and it remains to be seen if the Fed’s projected rate increases will be enough to tame and slow price increases. With retirement often lasting 30 years with longer life expectancies, inflation can have a big effect on quality of life. The average inflation rate for the past ten years has been 2.1% but jumped to 7.5% in January 2022. Inflation has been low for decades yet always has an impact on the cost of living. For now, it may be best to not overreact to policy shifts and maintain an investment portfolio appropriate for your long-term goals to keep pace with inflation. Stay focused and plan accordingly.

The opinions expressed are those of the writer as of April 4, 2022, but not necessarily those of Raymond James and Associates, and subject to change at any time. Information obtained from outside sources is believed to be accurate and correct, but not guaranteed. All investments are subject to risk, including loss. Diversification does not ensure a profit or protect against a loss in declining market. This material is provided for educational purposes only. Past performance is no guarantee of future results. There is no assurance the trends mentioned will continue or that forecasts discussed will be realized. Economic and market conditions are subject to change. Material is provided for informational purposes. Consult your tax professional and financial advisor before making any investment decisions. Holding investments for the long term does not ensure a profitable outcome. The foregoing is not a recommendation to buy or sell any individual security or any combination of securities.

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