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Is Stagflation on the Horizon?

Posted by Advocate Debt Relief Team

2 years ago / May 27, 2022

Amid economic unrest, many of us wish we had a crystal ball that could see into the future. A window that gives us an insight on how to avoid obstacles and possibly find a way to benefit from the situation. Unfortunately, time-telling crystal balls are only in fairytales.

Fortunately, in the real world, we can take perspective. We can look to current economic professionals, current events, and historical data to help us navigate the future.

What is Stagflation?

Inflation is the rate at which the price of goods and services in an economy increases. A high inflation and unemployment rate combined with slow economic growth is stagflation. Historically, this is a rare occurrence, but a perfect storm of Covid shutdowns, government policy, and a foreign war have resurfaced this language. Many economists say that our current landscape is ripe for stagflation.

Investor Perspective

The Consumer Price Index (CPI) went up across the board on energy commodities in March. We all felt the squeeze at the gas pump, but oil and gas impact every entity. Every product we consume or service we receive depends on fuel which drives up consumer costs on all products. Many investors are expecting slow global economic growth, the lowest since the collapse of the Lehman Brothers in the financial crisis of 2008.

War in Ukraine

Another perspective to weigh out is the pressure investors feel from two sides — the Federal Reserve raised interest rates and the war in Ukraine. Recently, the Federal Reserve raised interest rates by half a percent, and there is strong consideration they will raise it another .25%. Although this positively impacts bank savings, it drives up loan interest rates and makes it more difficult for businesses to grow.

The war in Ukraine has global investors worried. Known as the “breadbasket” of the European Union, Ukraine is a significant wheat producer. The leading destination of nearly 37% of Ukraine’s exports is the European Union, with sunflower seed, corn, and wheat the top three. This hits them harder, likely causing a slower economic growth rate abroad. Fund managers and global investors are expected to hold onto more cash mirroring the trend of April 2020 when Covid hit. Being a globally integrated economy, the U.S. will feel the pinch, but we’re better prepared because of a strong job market.

Historical Perspective

Although isolated, stagflation has occurred in U.S. history. Toward the end of Nixon’s presidency, to calm mild inflation, he made a bold move to end the gold standard that intertwined with the dollar’s value. Among other policies, he imposed wage-price controls, which led to difficult stagflation between 1973 and 1974.

Eerily similar to today’s situation, the early 1970s also faced an oil crisis fueled by international war. In 1973, Saudi Arabia declared an oil embargo on all nations that supported Israel during the Yom Kippur War. Among many other countries, the United States was targeted. By March of 1974, the embargo ended alongside the stagflation at the time.

Recent history illustrates a similar intersection of reactionary government policies to a crisis. The federal government extended unemployment benefits during the pandemic and created an artificial apparatus for not returning to work. Families maintained a livable income during Covid, while the workforce was depleted, making less available goods. When high demand with buying power meets low inventory, inflation begins.

How to Proceed

Understanding the problem is step one, but many want solutions. First, it’s essential to realize that there isn’t any magic bullet to fix stagflation or the impact you may incur. However, there are practical steps you can take to mitigate the damage. Some economists believe the U.S. will still see growth, although much slower than we’ve seen in some time.

The number one step is to stay informed on current economic trends. Taking a vested interest in the market, even if only understanding the basics, can help you move investments like a 401(k) into safer places. Regarding retirement investments, it’s a good idea to consider decreasing aggressive high-risk investments and repurpose them to slower growth options.

An additional step to take is delaying large purchases. Think through the long-term effects if you’re considering a new home purchase or that new car. The Federal Reserve’s rise in interest rates makes loan interest rates higher, impacting your bottom line.

Finally, a piece of advice that surpasses inflation or stagflation is to live within your means. An excellent general rule is that if you don’t have the cash to pay for it, don’t buy it. Creating a sound, realistic budget is essential to living within your means.

Maybe you’re stuck in debt that you feel has no end. Don’t worry; you’re not alone. Advocate Debt Relief can help create a financial plan that works to meet your goals. We may not know the future, but we can take significant steps toward financial freedom despite today’s circumstances.

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