McMillan argues that based on the 1970s definition, the U.S. could have experienced stagflation—there was a supply shock caused by pandemic-related supply chain issues and a significant increase in the money supply due to the Fed’s policies. Some point to former President Richard Nixon’s policies, which may have led to the recession of 1970—a possible precursor to other periods of stagflation. Nixon put tariffs on imports and froze wages and prices for 90 days in an attempt to prevent prices from rising. Once the controls were relaxed, the rapid acceleration of prices led to economic chaos. In mid-2022, many were saying that the United States had not entered a period of stagflation, but might soon experience one, at least for a short period. In June 2022, Forbes magazine argued that a period of stagflation was likely because economic policymakers would tackle unemployment first, leaving inflation to be dealt with later.

Meanwhile, global economic growth slowed sharply in the 1970s—a decade marked by two different recessions in the U.S. and the lead-up to a third one that began in 1980. During the 1970s, the supply of oil tailed off drastically and prices consequently rocketed, 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. Those events, along with easy monetary policy—which the American central bank, the Federal Reserve, pursued to lift employment—caused inflation to spiral out of control and threw the economy into disarray.

  1. It maintained it, causing two recessions to occur in the years following the Great Inflation before things settled down.
  2. Although the U.S. eventually overcame the stagflation scourge of the 1970s—after a decade of economic doldrums—the causes of stagflation and the best solution for overcoming it remain a matter of debate.
  3. Recently, though, economists have used the term more broadly to mean a period when inflation stays much higher than the Federal Reserve’s 2% target and the economy slows or even shrinks.
  4. 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.

The wage-price spiral, sometimes also called wage-push inflation or built-in inflation, describes instances when rising wages and prices reinforce each other, with higher prices driving wage increases which then result in still higher prices. The wage-price spiral is what can happen when policymakers fail to bring inflation under control. A long-lasting surge in prices has been quite rare in modern history and until this year, the inflation rate hadn’t been above 5% for 6 months or more since the 1980s.

Supply chain shocks

The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose. There’s a way to prep your big purchases, such as homebuying, as well. «Mortgages are great inflation hedges, as you get to repay in watered-down dollars,» Kotlikoff suggests. «Yes, mortgage rates are high, but after inflation, they are actually still negative.» «We’re not clearly in a recession, so we’re not clearly in a [period of] stagflation.»

Once thought by economists to be impossible, stagflation has occurred repeatedly in the developed world since the 1970s oil crisis. Stagflation can make a regular recession seem like a walk in the park. Prices rise rather than stay flat or fall, and the tools normally used to fix the economy are ineffective, meaning that this discomfort may last for a long time. This is not only an extremely uncomfortable environment to live in but also quite tricky for governments to fix.

What’s the Difference Between Stagflation and Recession?

There is no real consensus among economists about the causes of stagflation. They have put forth several arguments to explain how it occurs, even though it was once considered impossible. 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. Many of us will have experienced what living in a stagnant economy is like but will be unfamiliar with stagflation. Judging by its criteria and accounts from the 1970s, everyone would be better off if it remains history.

Excess demand

But even if we don’t have negative GDP numbers, they’re expected to be pretty weak in the second quarter. While disco and bell-bottom jeans were all the rage, there was a toxic combination of events and economic factors that led to a period of stagflation (dun-dun-dun). But many have offset the damage, at least in part, with wage increases driven by high demand for workers and resilient consumer spending.

In general, the stage is set for stagflation when a supply shock occurs. This is an unexpected event, such as a disruption in the oil supply or a shortage of essential parts. Such a shock occurred during the COVID-19 pandemic with a disruption of the flow of semiconductors that slowed the production of everything from laptops to cars and appliances. Another theory is that the confluence of stagnation and inflation is the result of poorly made economic policy.

In short, strong pockets of the economy have blunted the worst effects of severe inflation. In its strictest sense, stagflation refers to a stretch of rising unemployment coupled with sharply increasing prices. Economists have varying answers on this, but a lot depends on the GDP data that we’ll see come out of the second quarter, Kotlikoff warns. This data will indicate if we are truly in a recession, which is technically defined as two consecutive quarters of negative GDP growth and is often accompanied by high, or rising, levels of unemployment.

How likely is stagflation to happen again?

An increase in the cost of food, energy, or other individual items is generally not perceived as a sign of stagflation. However, a broad-based rise in the cost of goods and services can be an indicator. Investors who want to anticipate these increases can monitor trends in the Producer Price Index (PPI) and the Consumer Price Index (CPI). When stagflation occurs, don’t panic, sell your stocks and bonds and invest in rare art, gold, or other unusual commodities.

Stagflation is uncommon, but it has happened a couple times in the last several decades. The most notable case of stagflation took place in the 1970s, afflicting most Western economies. In Germany the total expenditure of the Empire, the Federal States, and the Communes in 1919–20 is estimated at 25 milliards of marks, of which not above 10 milliards are covered by previously existing taxation.

Meanwhile, The Conference Board, a nonpartisan, nonprofit economic think tank, also believes «periods of stagflation» — as well as a recession — are on the horizon. Rental properties would have made sense in the 1970s, but in the post-pandemic inflationary period, rental property investing was a tricky business. On the one hand, housing prices (and average rent prices) rose on an annualized basis, but many cities and states implemented eviction moratoriums (meaning you best forex indicator in the world couldn’t evict tenants who weren’t able to pay their rent). However, aside from a brief but severe recession due to the pandemic lockdowns in 2020, the economy muddled through, with gross domestic product (GDP) mostly positive and relatively steady. Another way to prep purchases while protecting yourself against inflation is to buy things now that you’ll otherwise need to buy in the future. «You can buy next year’s paper towels today and store them,» says Kotlikoff.

But Harvey disagrees, saying stagflation hasn’t arrived but poses a real threat. On rare occasions, however, high inflation persists even as the economy slows and unemployment rises, resulting in stagflation, she said. Stagflation is a real problem for policy makers because the Central Bank can increase interest rates to reduce inflation or cut interest rates to reduce unemployment. As things stand, both the Fed and the European Central Bank seem determined to bring inflation down to their target rates, even if that takes a while and could entail a recession. Long-term inflation expectations are within recent historical ranges.

Stagflation is not a good reason to completely abandon a sound investment strategy. However, if your portfolio has more aggressive investments or is not well-diversified, it may be time to decrease your risk. You can’t control what it costs to fill up your car or buy a gallon of milk. All you can do is adapt to the reality of the situation you’re living in.

It maintained it, causing two recessions to occur in the years following the Great Inflation before things settled down. By 1984, over 52,000 businesses had failed, home and car sales dropped dramatically, and unemployment rose to as high as 10%. With high inflation right now and negative economic growth in the first quarter of 2022, it’s easy to understand why those fears are popping up. When an economy slows, that leads to fewer jobs and higher unemployment. So folks have less money to spend on stuff that costs more due to inflation.