What is Stagflation? Are we going to have STAGFLATION? How Stagflation IMPACTS the Stock Market
What is Stagflation? According to the Corporate Finance Institute, stagflation is an economic event in which inflation is high, the economic growth rate slows, and unemployment remains steadily high.
As demand for products drops, companies lay people off thus driving up unemployment which in turn destroys demand thus contracting the economy. Also, the inverse relationship between unemployment and inflation also makes sense. This is often referred to as the Phillips Curve. But in effect, when you have low unemployment, consumers have more $, and that results in more demand and high prices. The opposite also holds true.
At this stage in the US economy, we have two out of those 3 criteria already in motion. The only indicator that hasn’t triggered yet for the economy to be in stagflation is high persistent unemployment, typically defined as 5%+. In fact, there are some 11 million unfulfilled jobs and for the second month in a row, unemployment is at a historical low of 3.6%.
In the US the last semblance of stagflation was in the 1970s which was caused by poor economic policy and the OPEC oil embargo of 1973. The conditions were absolutely atrocious as it was marked by double-digit inflation, sky-high mortgage rates, and a weak job market with unemployment hitting 7%.
To combat stagflationary conditions and inflation, in particular, the Fed Chief at the time, increased the feds interest rates to 20% to cool off the impact of rising prices triggering not one but two recessions. The actions absolutely worked but they came at a great cost to society but were arguably much needed.
Since then inflation has stayed within 5% with quick and timely fed action when the markets overheat or cool off.
So are we headed towards stagflationary conditions. The fed has made it abundantly clear it will do what it takes to combat inflation, and this will come in the form of rising rates. The expectation is for the fed funds rate to increase to 3.5-3.75% from the current 1.5%-1.75%.
Lots of companies have already announced layoffs and if rates actually get to those levels as suggested by the Feds terminal rate, unemployment will undoubtedly increase irrespective of the number of job openings.
This is because, with high rates, it will be more expensive for companies to borrow and invest in their operations. With less money circulating in the economy, and less demand for goods and services, undoubtedly companies will have to do layoffs.
While unemployment is the wild card currently, stagflation is certainly not outside of the realm of possibility and the odds are in favor of the chips landing unfortunately in its favor.
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