Conversely, cutting rates to stimulate jobs can make inflation worse. Managing energy prices and resources is key to preventing stagflation caused by supply shocks. Governments need to secure stable energy supplies and consider alternative energy sources to reduce dependency on volatile resources like oil.
Businesses in these sectors tend to have more stable earnings, which can provide some protection against stagnant economic growth and inflation. “In particular, we believe investors should favor companies with pricing power that are able to pass increased costs to consumers.” 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.
Another recession just a year later saw unemployment spike to 10.8% while inflation ranged from 7% to 10%. Even during the Great Recession from 2007 through 2009, inflation remained above historical averages until late 2008 despite the unemployment rate hitting double digits. With inflation reaching a 40-year high in 2022 and unemployment reaching the highest rate since the Great Depression in 2020, it’s natural to be concerned about stagflation in the U.S. However, both of these indicators have improved, with inflation ebbing from 6.6% in September 2022 to 3.0% in January 2025. 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. Gold performed well in the 1970s, as it and other precious metals are seen as a traditional hedge.
Is Stagflation Worse Than a Recession?
The 2025 Trump tariffs have revived concerns about this economic phenomenon in a way not seen since the 1970s, with Federal Reserve officials warning about higher inflation alongside slower growth. The severity of stagflation can be measured by the “misery index,” a straightforward sum of the inflation and unemployment rates. As the misery index rises, Americans face the painful combination of fewer available jobs and declining purchasing power. Stagflation combines stagnant economic growth, high unemployment, and persistent inflation. It defies traditional economic models, which typically show inflation rising during strong economic growth and falling during recessions. Stagflation is an economic condition characterized by slowing economic growth, high unemployment, and rising prices (inflation) simultaneously.
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. To combat inflation, the Federal Open Market Committee (FOMC) can raise interest rates, but doing so also causes households to cut back on spending because savings rates rise. This reduced spending erodes businesses’ bottom lines and can reduce hiring, thus unemployment rises. So when stagflation looms, the Fed is caught juggling a double-edged sword.
- 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.
- Central banks must balance controlling inflation with supporting economic growth, making traditional recession-fighting tools less effective.
- A supply shock happens when there’s a sudden disruption in the supply of critical goods, such as oil or food.
- Stagflation, a rare yet concerning economic issue, arises when high inflation and economic stagnation occur simultaneously.
Current Risk of Stagflation
According to the classic theory, when inflation is high, unemployment is supposed to be low, and vice versa. The term stagflation is a portmanteau of the words stagnation and inflation. In addition to the World Bank, other major institutions—like Goldman Sachs and BlackRock—also warned about stagflation risks.
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Discount grocery stores may even see more customers as people look for cheaper options. However, there are some stocks that could do quite well if stagflation arrives. Companies that provide essential products and services and have pricing power, such as utilities, grocery stores, food manufacturers, and healthcare providers could be smart ways to invest. Inflation-protected bonds can also be smart investments during stagflationary periods.
What Is Stagflation and How Can Investors Prepare?
Stagnation is often defined as a period in which gross domestic product (GDP) is either growing very slowly or declining, says Frank Brochin, chief investment officer of Family Office Practice at The Colony Group. “Stagflation is a serious risk for investors because of its persistence,” says Michael Rosen, chief investment officer and co-founder of Angeles Investments. “That is, stagflation is rarely a transitory event and it erodes how to invest in startups and equity crowdfunding like an angel investor portfolio values over time, often marked by years.” Comparatively, the average length of all recessions since World War II is about 10 months. In 1980, the Federal Reserve, led by chair Paul Volcker, raised the Fed funds rate to as high as 21%. This led to a painful 16-month recession and spike in the unemployment rate to 10.8%.
The Motley Fool reaches millions of people every month through our premium investing solutions, free guidance and market analysis on Fool.com, top-rated podcasts, and non-profit The Motley Fool Foundation. “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 destructive combination can put households and businesses in a tight spot as incomes fail to rise as fast as prices increase, he says. “Stagflation, in that sense, is more impactful on portfolios than a one-off crisis.” When the US saw stagflation in the ’70s and ’80s, the unemployment rate peaked at about 9% in 1975, before cooling and rising to another peak of 10.8% in the early ’80s, according to the Bureau of Labor Statistics. The jobless rate in the US will keep picking up through at least the next 18 months.
Stagflation in the post-pandemic economy?
The stagflation meaning in economics, a term that seems almost paradoxical at first glance, is an economic conundrum that has puzzled economists and policymakers for decades. Imagine an economic scenario where inflation is soaring high, economic growth is stagnating, and unemployment remains persistently elevated. These events caused oil prices to surge, leading to widespread inflation. Businesses had to pay more for energy and passed these higher costs on to consumers by raising prices for goods and services.
- Prior to Trump’s tariffs, the firm wasn’t anticipating a recession at all this year, Sløk said.
- With this, we see a decrease in job openings, layoffs and rising unemployment rates.
- This could mean investing in new technologies, improving infrastructure, or encouraging businesses to increase production.
- Apollo estimates that unemployment could rise from 4.2% currently to 4.4% in 2025 and tick up to 5% or higher in 2026.
- In stagflation, they rise together — creating a troubling scenario for policymakers.
- Factors such as supply chain disruptions, geopolitical tensions, and unprecedented monetary policies have contributed to inflationary pressures and economic uncertainty, raising fears of a stagflationary environment.
“If anything is going to derail markets today, it will overwhelmingly be stagflation.” Stagflation is also a challenging environment for policymakers to combat. The Federal Reserve is tasked with keeping prices stable and unemployment low. This becomes particularly difficult when the primary tool for combatting the first exacerbates the second. The 1970s are known for many things, but the one economists are most likely to recall is stagflation, the combination of high inflation and unemployment that can cripple an economy and investor portfolios. When weighing big purchasing decisions—like a car, for example—consider whether you can defer or delay the purchase of items where prices may be temporarily elevated, he adds.
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Stagflation is basically like a recession with the added headache of rising prices and costs to service debt. 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. Yes, Stagflation is sometimes more difficult than a recession because it leads to both high prices and high unemployment at the same time. This makes it difficult for the economy to retrieve since fixing one problem can make the other worse.
