What is Stagflation? Definition of Stagflation, Stagflation Meaning

High-dividend stocks from companies with stable cash flows and consistent dividend-paying capabilities, including utilities, consumer staples, or REITs, generally show resilience during economic downturns. Real assets are often favored as they possess intrinsic value and can offer a hedge against inflation. This category includes gold and other precious metals, which have historically been seen as safe havens during times of economic uncertainty and high inflation, retaining their value when currencies may be depreciating. Commodities and real assets might fare better during stagflation, whilst fixed-income and defensive equities could be more suitable during a recession. One of the awesome things about investing is that if you do it right and diversify, you can hedge against inflation. Next comes falling consumer sentiment, which, yes, we’re also seeing right now in the U.S. as people pull the reins on spending.

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Standard tools, like raising interest rates to combat inflation, can be less effective when inflation is driven by supply constraints rather than excessive demand. In such times, so-called demand-side tools risk further stifling economic growth and increasing unemployment, thus worsening the stagflationary conditions. Supply shocks, such as sudden increases in oil prices or disruptions in global supply chains, can trigger stagflation. These events can lead to higher production costs, which companies may pass on to consumers, resulting in inflation. Simultaneously, these increased costs can reduce economic output and employment, causing stagnation. Governments can carefully manage the demand-side tools of the fiscal and monetary policies to mitigate inflationary pressures without unduly stifling economic activity.

Demand-pull stagflation theory

In contrast, deflation specifically signifies a continual decline in the overall price level of goods and services within an economy. Although the term lacks a formal definition, stagflation occurs during times of high inflation and slow economic growth. Higher inflation rate depletes the purchasing power of consumers leading to lower demand of goods and services in the economy. Due to the fall in real income, people demand higher wages which puts further pressure on the costs of production.

Is stagflation worse than recession?

“In particular, we believe investors should favor companies with pricing power that are able to pass increased costs to consumers.” One of the worst bouts of stagflation happened in the 1970s after a spike in oil prices from the Arab oil embargo on the US and other countries that supported Israel in the 1973 Yom Kippur War raised the cost of living dramatically. But when the Fed tried to ease inflation by raising interest rates, the economy fell into a recession.

That’s certainly better than 7%, but ideally, the Federal Reserve would prefer it to be lower. Lower inflation means goods remain affordable, which makes it easier for consumers to weather economic downturns. Historically, economists, influenced by the Great Depression and Keynesian principles, believed policies curbing inflation raised unemployment, and vice versa.

Further, any opinion or estimate is made on a general basis and subject to change without notice. Therefore, no representation is made as to the completeness and adequacy of the information to make an informed decision. You should carefully consider (i) whether any investment views and products/ services are appropriate in view of your investment experience, objectives, financial resources and relevant circumstances.

The most widely accepted view focuses on the era’s major supply disruptions. When significant economic shocks reduce an economy’s productive capacity while simultaneously raising costs, both inflation and unemployment can rise together, as occurred during the 1970s oil crisis. British politician Iain Macleod first used the term “stagflation” in a 1965 speech to the House of Commons to describe the U.K.

Stagflation refers to a situation in the economy when a high rate of inflation coexists with high unemployment and slow economic growth. Stagflation occurs when economic growth slows and the unemployment rate spikes and can create a challenging environment for investors. The term “stagnant” implies sluggishness and a lack of activity that could mean either a full-blown downturn or just very weak growth.

It underscores the importance of continuous research, analysis, and adaptation in the face of economic challenges. While stagflation might test the limits of economic theories and policy tools, it also presents an opportunity for innovation and resilience. Therefore, as stock market investors, it’s crucial for you to take a balanced approach that acknowledges the potential challenges while also recognizing the opportunities that can arise. In the 1970s, the Federal Reserve responded to stagflation by increasing government spending to achieve full employment, resulting in higher inflation. However, this approach failed to address the employment issue and ultimately led to the Great Inflation, culminating in a global recession marked by prolonged economic decline and elevated unemployment. When you’re not obligated to paying debt monthly, you will have more freedom to manage your earned income.

• Additionally, fostering economic growth and productivity through strategic policies is crucial.
• The Fed used expansive monetary policies in responseto this economic downturn.
• The result was a toxic combination of rising unemployment and accelerating inflation that persisted throughout the decade.
• The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice.
• In that case, the government, people, and corporations would be willing to pay high prices for a given resource.
• You should carefully consider (i) whether any investment views and products/ services are appropriate in view of your investment experience, objectives, financial resources and relevant circumstances.

What Is Stagflation?

The complex interplay of these factors makes asset allocation difficult, underscoring the need for careful planning and diversification in portfolios to mitigate the adverse effects of stagflation. Since then, things have calmed down considerably, but the uncertainty felt by investors in the first half of the year is unlikely to fade anytime soon, with one word being thrown around more often than others, “stagflation”. When we look back at 2025, a decade from now, we’ll think of how the first half of the year has been a rollercoaster for investors. The U.S. appears to be on the precipice of stagflation, but the economy can change rapidly and without notice. It’s important to keep up with the news (calmly and without letting it provoke you to, say, drop an investment without heavy consideration and research) and stay flexible.

• A recession could mean poor stock market performance too, because of the lack of growth as well as the fact that people may invest less money and sell investments they already owned.
• Later on, at the time of the oil crisis, the price of oil increased threefold in the 1970s and stagflation resulted.
• “That this index is widely referred to as the ‘misery index’ shows how painful stagflation is,” Brochinm says.
• Apollo does not act for you and is not responsible for providing you with the protections afforded to its clients.
• “Stagflation also poses a risk to bonds since the fixed interest rates they offer might not be high enough to offset the loss of buying power given the high rate of inflation.”

This article is based on current events, research, and developments at the time of publication, which may change over time. Create a buffer for yourself with an a girl’s guide to personal finance emergency fund and hold the money in an FDIC insured bank account. Most financial professionals recommend saving between three to six months’ worth of basic expenses — which should be enough to cover your bills and basic living expenses in times of crisis. This way, if you experience a drop in income, lose your job, or face another type of emergency, you will have a safety net. Stagflation, however, isn’t always something that governments can find their way out of with policy.

What is stagflation? A double whammy of headwinds

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. Below, we take you through stagflation’s history, why conventional economic theories have found it so difficult to address, and the pain it inflicts on everyday people who see spiraling prices as job losses mount.

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A quintessential instance of stagflation emerged during the 1970s when numerous developed economies, including the United States, underwent a phase of lethargic economic growth, elevated joblessness, and surging inflation. Spikes in the cost of raw materials can give rise to stagflation, triggering inflation and leaving consumers with less money to spend. Because stagflation is so complex and impacts entire economies in big ways, you probably can’t prepare so that you’re entirely immune. As with a large recession, stagflation typically has impacts on your investments and wealth-building processes.

As we normally understand the economic cycle, economic growth comes with an increase in jobs and, eventually, a rise in the price of goods and services, aka inflation. (The Fed’s target for “healthy” inflation is around 2%.) In contrast, when the economy slows, the job market begins to contract, and inflation also cools. It seems like a simple solution—lowering/raising interest rates to stimulate or slow down the economy, as if all the central bank has to do is flip a switch. Lower interest rates could make inflation worse while higher rates could slow economic growth too much, resulting in a higher unemployment rate. This predicament can make escaping a period of stagflation particularly difficult. In the neoclassical viewpoint, the real factors that determine output and unemployment affect the aggregate supply curve only.

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This presentation does not constitute an offer of any service or product of Apollo. Nothing herein should be taken as investment advice or a recommendation to enter into any transaction. Finally, even if the pace of economic growth slows or even contracts—as many people on Wall Street are forecasting—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 says. Central banks also face a difficult dilemma, making monetary policy unpredictable and leading to increased currecny volatility and a “flight to safety” towards strong currencies. Currently, financial markets see Fed officials as likely to give more consideration to the issue of growth.