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 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 Bank’s mission is to curb inflation. That’s our main focus right now. That’s why we’re increasing interest rates so quickly,” says the Bank of Canada public information service. 

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.”

Should I be worried about stagflation in Canada? 

Looking at current indicators, Sun Life financial security advisor Alexandre Demets remains optimistic. “Canada’s economy is still healthy right now. Unemployment is at a record low (5.2% in April 2022, according to Statistics Canada),” he notes. 

The strong job market is actually one of the main reasons the Bank of Canada is not overly concerned about a recession. “The current situation contrasts with the stagflationary environment we saw in the 1970s,” explains the Bank of Canada website.

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What does stagflation mean for my savings and investments?

“The most defining characteristic of stagflation is high inflation,” says Mullarkey. 

According to him, the best performing assets tend to be: 

  • inflation-protected bonds;
  • floating rate corporate bonds;
  • commodities like natural gas, wheat, steel and gold; 
  • real estate.

Are you an investor who takes the long view? 

“It’s never a good idea to make changes when markets are down. Technically, you should invest when markets are low and sell when they’re high.  But people tend to do the opposite,” says Alexandre Demets. 

He says investors who invest for the long term may want to consider increasing their percentage of stocks versus bonds. “There’s more fluctuation with stocks. This can range from plus or minus 20 points from year to year. But long term, you would have higher returns on stocks than bonds.”

That being said, there’s no magic formula. Every investor is different. The best thing to do is speak with an advisor. An advisor can build an investment profile that reflects your individual needs. And any plan would certainly take stagflation risks into account. 

Connect with your financial advisor. Together you can review:

  • your short- and medium-term financial goals;
  • how diversified your portfolio is;
  • your risk tolerance.

If nothing has changed, your advisor will likely advise you to stick to your original plan.

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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.

“Keep in mind that a February 2020 Bloomberg study said that since 1956, the average loss when markets drop is 27%. And the average recovery during the subsequent bull market is 144%,” Demets says. 

What can you do? “Invest 10% of your income and live within your means. Here are a few good financial habits to protect you in times of economic uncertainty,” Demets reminds us. 

Steps you can take:

Create a budget

A budget can tell you at a glance how much money you have coming in and going out. It shows you where you can cut back to increase your savings.

Set up automatic savings

To make sure you don’t forget to contribute, it’s a good idea to set up automatic deposits from your chequing account to your RRSP or your TFSA

Take a look at your lifestyle 

Do you really need multiple streaming subscriptions, restaurant dinners and luxury vehicles to be happy? Your priorities should match your budget.

Make sure your savings/spending ratio is balanced

Standard advice is to save 10% of your salary, but you can always set aside more. If you do, you may be able to retire early down the road!

Rein in your debts

Consolidating all your debts with a single, low-interest loan can save you a lot of money.

Manage your credit cards

Set yourself a spending limit and have a repayment plan. Make the minimum payment so you don’t lower your credit score.


Need help figuring out what’s right for you?

An advisor can help put together a solid plan that suits your goals.