What Is Stagflation?

Federal Reserve chair Jerome Powell has emphasized that the Federal Reserve would continue raising interest rates until inflation falls steadily, an effort that could risk a recession in the U.S. In 2008, the Zimbabwean government printed so much money it went beyond stagflation and turned into hyperinflation. Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.

In addition to the World Bank, other major institutions—like Goldman Sachs and BlackRock—also warned about stagflation risks. And former Fed Chair Ben Bernanke said in May 2022 that the U.S. could be in for a period of stagflation. While it’s unlikely that the U.S. economy is headed for another bout of stagflation, it’s important to contextualize what’s happening with the prominent episode of stagflation in the 1970s. These examples suggest the consumer confidence number is at least as potent a predictor as the approval polling.

When disease and natural disasters strike, economies – like people – are destined to suffer. Economic losses, from businesses and homes to crops and livestock (not to mention physical and mental health problems) accompany natural disasters and disease, often impacting thousands or even millions of people. As we’ve all seen and experienced in 2020 and 2021, a pandemic can cause widespread shutdowns, declining economic activity, and job losses or loss of job growth.

Biden was able to begin his reelection campaign with inflation numbers comparable to Reagan and Obama’s at the same point in their presidencies. The University of Michigan has been compiling statistics and calculating an index of confidence on the part of American consumers since the mid-1970s, a time when that level of confidence was at the center of national politics. Ford, who took office when Nixon resigned in 1974 under threat of impeachment, struggled to manage a weak hand on several economic fronts. Energy costs were surging, employment growth was stagnant and inflation was approaching double digits. Stagflation is a portmanteau, that is, a word that blends two others (in this case, “stagnation” and “inflation”).

  1. Soon, both inflation and unemployment rates were climbing, and the government found itself facing a serious dilemma.
  2. “I think we’re going to see higher interest rates to reduce demand — reduce demand by companies, reduce demand by consumers.”
  3. The advent of stagflation across the developed world later in the 20th century showed that this was not the case.
  4. Fixed-income investors can turn to shorter-duration bonds and Treasury inflation-protected securities (TIPS), which adjust their principal to match inflation, to minimize the impact of rising inflation.

Yet another way of gauging the national attitude toward an incumbent president is to shift the focus of measurement from the voter to the consumer. While it is the largest economy in the world, the U.S. economy is still consumer-driven and dependent on the relative willingness of ordinary citizens to buy goods and services. Stagflation is a term often seen in the news with respect to the economy. When stagflation shook the United States in the 1970s and early 1980s, investors rushed to gold and silver as a shelter.

However, stagflation is a rare combination of growing inflation and stagnant economic growth. The combination of slow growth and inflation is unusual because inflation typically rises and falls with the pace of growth. The high inflation leaves less scope for policymakers to address growth shortfalls with lower interest rates and higher public spending. The only difference between inflation and stagflation is economic growth. Typically, inflation is coupled with economic growth and can even be a byproduct of a rapidly expanding economy. Stagflation refers to the rare and puzzling phenomenon of a recession coinciding with prolonged high inflation.

How to Navigate Stagflation

Finally, even if the pace of economic growth slows, investors should focus on tweaks to their asset allocations rather than wholesale changes. “Don’t panic and do something foolish, still kind of stay the course,” Bond https://bigbostrade.com/ says. One reason both Reagan and Obama survived was that both were seen as hauling the economy back up out of serious recessions. Reagan saw unemployment go above 10% for the first time since the Great Depression.

If supply-chain snags were to ease, making cars, electronics, food and fuel more plentiful, prices would fall quickly, said Chester Spatt, professor of finance at Carnegie Mellon University’s Tepper School of Business. In short, the economy does not currently face stagflation, Hunter and other economists told CBS MoneyWatch, although slower growth is a concern looking ahead. Recessions are considered a normal part of the economic cycle, happen quite often, and historically last just under a year.

How to invest during stagflation

“At the same time, inflation reduces the purchasing power of households and consumer confidence declines, further impacting economic growth,” he says. “In such economic conditions, businesses and individuals face difficulties in planning and making investment decisions.” As far as the Federal Reserve is concerned, the best way to head off stagflation is to raise interest web3 stocks rates high enough to dampen consumer demand. High prices squeeze household budgets and reduce consumer spending, while weak economic activity means businesses grow slowly, if at all, and corporate profits slump. The financial markets suffer, too, with stocks and bonds both declining in value, said Andrew Hunter, senior U.S. economist at Capital Economics.

Supply theory

One theory states that stagflation is caused when a sudden increase in the cost of oil reduces an economy’s productive capacity. The economic theories that dominated academic and policy circles for much of the 20th century ruled it out of their models. In particular, the economic theory of the Phillips Curve, which developed in the context of Keynesian economics, portrayed macroeconomic policy as a trade-off between unemployment and inflation. The term stagflation was first used by British politician Iain Macleod in a speech before the House of Commons in 1965, a time of economic stress in the United Kingdom. He called the combined effects of inflation and stagnation a “‘stagflation situation.”

The most commonly cited example of stagflation is the 1970s oil crisis. Whatever the explanation, we have seen inflation persist during periods of economic stagnation since the 1970s. Nixon removed the last indirect vestiges of the gold standard, bringing down the Bretton Woods system that had controlled currency exchange rates. The advent of stagflation across the developed world later in the 20th century showed that this was not the case. Stagflation is a great example of how real-world experience can run roughshod over widely accepted economic theories and policy prescriptions.

For many Americans it was their first real dose of what inflation can do. Rate hikes by the Federal Reserve Board slammed the brakes on inflation in 2023 and raised fears of a recession. While a downturn has yet to develop, the possibility of one conjures memories of the low-growth/high-inflation “stagflation” of the 1970s that proved fatal to the presidencies of Ford and Carter. The second President Bush had a Reagan-like consumer confidence metric of 93.7 in November 2003, yet barely won a year later with the narrowest reelection margin of any president since 1916). Trump, too, was sailing along with a dizzying 96.8 consumer confidence index one year before losing to Biden by 7 million in the popular vote. The boom years lasted long enough to boost Reagan’s vice president and successor, George H.W. Bush, in 1988.

It showed the “wrong track” answer was chosen by an average of 70% and “right direction” by just 23% in the five most recent presidential election years when the president (or his party) lost. The gap had averaged 46 points in those years (1980, 1992, 2000, 2008 and 2016). If presidential approval numbers are not perfect predictors of an incumbent’s reelection, is there something else that is? Observers have long sought the True North by which to set their compass and their expectations. The classic case of defying the odds and the oddsmakers was the shock reelection of Harry Truman in 1948. His approval number was still above 50% with a year to go, but it tumbled all the way to 36% in April of 1948.

If inflation rose above that target, the Fed would reverse course and institute constrictive monetary policy. It included the economic stimulus package and record levels of deficit spending. People warned of the risk of stagflation if inflation worsened and the economy didn’t improve.

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