McMillan says that paying attention to both the underlying data and the headlines is important. “If you’re an investor, you need to play off expectations as much as reality,” he says. But stagflation never arrived, and McMillan isn’t worried about another episode happening any time soon. He says that’s because the economy is fundamentally different today than it was back then. While the U.S. has sidestepped another bout of stagflation since the 1970s, some commentators have drawn parallels between that episode and recent dynamics in the economy.
“Compared to the U.S., the odds of stagflation in Canada are lower, and here’s why — the U. Has imposed tariffs on almost every single major trading partner,” she said. “What we see with tariff talk is that Donald Trump is completely destabilizing what global supply chains were rebuilt after COVID restrictions were lifted. That’s why the topic (of stagflation) is coming in vogue again,” he said.
NetworkYour trusted source for investing success
But one measure seems to support the idea that stagflation should not be a top-of-mind concern for investors at the moment. In the 1970s, economist Arthur Okun developed an index to measure stagflation that is calculated by adding the unemployment rate to the annual inflation rate. “That this index is widely referred to as the ‘misery index’ shows how painful stagflation is,” Brochinm says. “Investors might be tempted to make drastic changes to their portfolios if they are concerned about stagflation, but we continue to believe that diversification and taking a long-term investing approach are key,” Martin says.
Labor Market Disruptions
While it may look gnarly now, historically, the resiliency and overperformance of the American economy would suggest that buying US stocks when they are this deep into a sell-off will pay off. Lower interest rates can boost a weaker economy, but they can also stoke inflation. If inflation remains sticky, the central bank is more likely to continue pausing rate cuts. For decades, experts didn’t believe stagflation was possible because it goes against basic principles of supply and demand. Usually, when more people are out of work, prices go down because demand for goods and services is lower. When businesses cut costs, hiring slows down and layoffs increase for a sustained period, households receive less income and spend less.
- These supply shocks followed an accommodating monetary policy by the Federal Reserve, aimed at stimulating economic growth.
- Commodities, especially oil amid an embargo, and those with limited supply, performed strongly.
- Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.
- Simultaneously, excessive government spending and loose monetary policy resulted in high inflation rates.
For example, the 1973 oil crisis saw the price of oil rise dramatically in the US after an embargo, setting off a period of stagflation. A commodity price spike high enough to trigger stagflation could come from the demand side instead of the supply side. In that case, the government, people, and corporations would be willing to pay high prices for a given resource.
Historically, economists, influenced by the Great Depression and Keynesian principles, believed policies curbing inflation raised unemployment, and vice versa. However, the occurrence of this extreme inflation in the latter half of the 20th century challenged this perspective. Stagflation might be an economist’s nightmare, but it doesn’t have to be yours. While you can’t control inflation, interest rates, or economic policy, you can control how you respond. If you stick with your investment strategy, you should see positive results as the economy recovers and transitions to more favorable conditions. High-yield savings accounts and CDs can be a great way to protect yourself against stock market turbulence while also taking advantage of high interest rates.
Stagflation Challenges and Impact
For you, that means potentially steeper ups and downs in the stock and bond markets. We’ve already gotten a taste of that recently, as investors were forced to deal with some of the most volatile weeks in history for stocks and yields. “While prices are on the firm side and growth has cooled from a too-warm pace, unemployment remains closer to historic lows than not,” said Keith Gumbinger, vice president at housing market news site HSH.com. Right now, there are some signs of tariff-related inflation, but the full impact on consumer prices likely won’t be seen for several months. Most economists say the likelihood of entering a period of stagflation is still quite low, but some warn that Trump’s trade policies could fuel the fire.
- This created a situation where the public began to expect continued inflation, leading to preemptive price increases and hindering long-term investment.
- That kind of government paralysis could drag out economic hardship, especially for the most financially and socially vulnerable populations.
- The Fed started lowering interest rates in September, even though unemployment was historically low — a nod to a victory over COVID-era inflation.
- It erodes consumer purchasing power and enforces difficult choices on households.
More from Global News
Government stimulus is a recent example of this, but a large increase in the money in consumers’ pockets typically causes inflation. As a more recent example, when the government spent trillions on an economic stimulus package during the COVID-19 pandemic, we saw a surge in demand for products such as electronics, used cars, and airline tickets. In the US, stagflation occurred during the 1970s through the early 1980s.
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.” “At the same time, inflation reduces the purchasing power of households and consumer confidence declines, further impacting economic growth,” he says.
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more – straight to your e-mail. You can change your settings at any time, including withdrawing your consent, by using the toggles on the Cookie Policy, or by how to invest in the ruble clicking on the manage consent button at the bottom of the screen. Get stock recommendations, portfolio guidance, and more from The Motley Fool’s premium services. But what exactly is stagflation, and why is it such a concern for investors?
But Nguyen said any slowdown or recession in the United States will send shockwaves up north. Nguyen said the odds of a recession in North America “have definitely risen,” but a lot depends on how long the tariff pressure continues and what Canada’s response to Trump’s trade war looks like. Tu Nguyen, economist at RSM Canada, said stagflation is a highly unusual economic phenomenon since it is the simultaneous occurrence of two opposing forces. It’s a combination of stagnation and inflation,” said Moshe Lander, economist at Concordia University.
Investing News
But given that the Trump administration is hell-bent on cutting costs and government headcounts, it’s unlikely that avenue of relief is available. People flee the stock market because companies can’t maintain profit margins. They also shun bonds because fixed income often can’t keep up with the pace of price increases. Tangible assets like gold and oil turn into safe havens, but even their values are roiled by violent changes in supply and the tradeallcrypto crypto broker: a reliable firm demand. Tariffs, or import taxes on goods from another country that are paid by the importer, can have a similar effect to oil supply shocks, causing widespread disruptions and cost increases along supply chains.
Rental prices consistently align with inflation, reinforcing the resilience of property as an investment choice. Stagflation serves as a reminder that the economy is a dynamic and intricate system, where cause-and-effect relationships are not always straightforward. It underscores the importance of continuous research, analysis, and adaptation in the face of economic challenges. While stagflation might test the limits of economic theories and policy tools, it also presents an opportunity for innovation and resilience. Therefore, as stock market investors, it’s crucial for you to take a balanced approach that acknowledges the potential challenges while also recognizing the opportunities that can arise.
Very high inflation can be caused when interest rates are too low, governments are “printing money,” excessive government spending or stimulus are issued, or major events are causing supply chain or global trade disruptions. High interest rates mean households have less spending power and a likelihood of less investment and hiring by businesses. “During a period of stagflation, businesses struggle to grow due to slowing economic activity, and cannot easily reduce costs due to rising input prices,” Brochin says.
While the average recession lasts about 11 months, the last bout of stagflation in the US lasted more than 10 years. Recessions have an established, if imperfect, playbook to diminish their impact. The Fed, which is in charge of maintaining price stability and maximizing employment, usually lowers interest rates to stimulate the economy and buoy employment during a downturn. According to Sher, legacy fx review there’s a misguided assumption that consumers will be willing to pay the higher cost of goods brought on by tariffs. “Consumers will be more likely to sit on their hands and stop spending, which will further stoke the recession flames,” said Sher.