October 3, 2022
Read time: 4 minutes
The cost of housing, gas and food keeps going up. But stock markets are down. Economists around the world are talking about stagflation.
Here’s what it means and what you can do to protect yourself.
What is stagflation and what are its effects?
The word “stagflation” is a combination of “stagnation” and “inflation”.
“We talk about stagflation when the economy is experiencing high inflation but has low growth and low employment. To central banks and economists, this combination is an anomaly,” says Dec Mullarkey, Managing Director of Investment Strategic Research & Initiatives at SLC Management.
Normally, when economic growth is high, employment and inflation also tend to be high. And when growth slows, employment and inflation also fall.
In this traditional setting, central bank tools are fairly effective.
- If growth is running too high, central banks can cool the economy by increasing rates. This slows down activity, which lowers employment and inflation.
- On the other hand, if growth is low, central banks can cut interest rates. This increases activity, which increases employment and inflation.
However, persistent stagflation is different, says Mullarkey. “Raising rates to curb inflation will drag down what is already a low growth environment. That would drop employment even further, causing a deep recession.”
Why are economists and politicians worried about stagflation?
As long as inflation remains high, central banks cannot cut interest rates to revive growth.
The US, Canada and other developed countries have some of the highest inflation levels in over 40 years. “Some of this is the result of high commodity prices,” says Mullarkey. “Because central banks can’t control prices, they hike interest rates to curb inflation. The fear is that they may have to keep rates high for an extended period, driving the economy into a deep recession as activity and employment drop.”
What can I do to protect myself during a financial crisis?
The markets’ dramatic drop in mid-June has some investors worried. And for good reason. In the short term, market volatility can seem devastating. But taking a long-term view is helpful.
