Nevertheless, the U.S. entered into a period of stagflation in the 1970s, when it experienced simultaneous increases in consumer prices and unemployment. Confronted with a reality that was thought to be impossible, Keynesian economists struggled to come up with an explanation or a solution. In the late 1970s and in the decade that followed, monetarist orthodoxy, as evangelised by Mrs Thatcher as leader of the opposition and then Prime Minister, decreed that the gottwals books walls of books money supply had to be reduced in order to fight inflation.

Inflation vs. Stagflation: An Overview

And while our site doesn’t feature every company or financial product available on the market, we’re proud that the guidance we offer, the information we provide and the tools we create are objective, independent, straightforward — and free. Many of us may have experienced what living in a stagnant economy is like but will be unfamiliar with stagflation. Judging by its criteria and accounts from the 1970s, everyone would be better off if it remained history. We could find ourselves in an economic crisis like no other if events pan out as Roubini envisions with 1970s-style stagflation potentially being accompanied by a debt meltdown similar to the 2008 Great Recession. Stagflation can make a regular recession seem like a walk in the park.

What is stagflation?

Finally, even if the pace of economic growth slows or even contracts—as many people on Wall Street are forecasting—investors should focus on tweaks to their asset allocations rather than wholesale changes. “Don’t panic and do something foolish, still kind of stay the course,” Bond says. But Fed historians argue the Fed wasn’t tough enough in the ‘70s and ‘80s. Stagflation marked the worst performance by advanced economies between the Great Depression and the Great Recession, and as such left a lasting mark. It led economist Arthur Okun to come up with a misery index summing the inflation and unemployment rates, and the name encapsulates how that period of economic history is remembered. The PPI measures the average change in selling prices received by domestic producers of goods and services over time.

The next biggest risk they identified was deflation, with 13% of respondents. Productivity measures may be examined collectively across the whole economy, or they may be viewed individually by industry to investigate trends in labor growth, wage levels, and technological improvement. In remarks after the release of the Fed’s decision Wednesday to leave interest rates unchanged, Powell said he didn’t «really 14 swiss franc to norwegian krone understand where talk of a stagflation scenario is coming from» given the preponderance of solid economic data. The inflation also led to rising unemployment as the post-war economic boom stalled. Coryanne Hicks is an investing and personal finance journalist specializing in women and millennial investors.

1. This data will indicate if we are truly in a recession, which is technically defined as two consecutive quarters of negative GDP growth and is often accompanied by high, or rising, levels of unemployment.
2. In an economy running hot by operating above its long-term potential, price increases are necessary to ration labor and other scarce inputs and to offset those increased production costs.
3. Families of soldiers or those working directly or indirectly for the military-industrial complex are earning incomes they couldn’t have imagined pre-war.
4. It gained broader recognition in the 1970s following a series of global economic shocks, particularly the 1973 oil crisis, which significantly disrupted supply chains and contributed to rising prices and slowing growth.
5. A wage-price spiral seemed improbable for decades after Paul Volcker’s Fed tamed inflation in the early 1980s, bringing stagflation to an end.

The ensuing contraction of the economy and devastating impact on public services forced a change in strategy of the Conservative government which ultimately benefited from a surge in economic growth and rising standards of living across the board. If you want more tactical advice, consider overweighting defensive stocks in sectors such as consumer staples, utilities, energy and healthcare, Brochin says. 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.» «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.

Stagflation vs. Inflation

Stagflation is a unique economic phenomenon; a mix of slow growth, high unemployment, and rising prices. Cost-push inflation reflects a rise in prices of one or more key economic inputs, such as crude oil, grain, or labor. Cost-push inflation results when producers are able to recoup their increased costs by increasing the price of finished products. If input costs rise as a result of a temporary disruption in supply such as factory closings caused by a pandemic, for example, policymakers may reasonably assume the price pressures will prove temporary as well. Today’s U.S. economy does look much better than that of the 1970s, according to most data. During the 1970s, the rate of inflation was already rising when a series of oil supply shocks caused by the Organization of Petroleum Exporting Countries (OPEC) oil the complete 2021 bitcoin tax guide embargoes resulted in oil prices tripling or even quadrupling very quickly.

All of this is happening in the context of a new government still finding its feet and experiencing the cold blast of public opinion on some of its unpopular flagship policies. Many, or all, of the products featured on this page are from our advertising partners who compensate us when you take certain actions on our website or click to take an action on their website. Not many traditional asset classes fare well in this kind of environment.

Stagflation occurs when economic growth slows and the unemployment rate spikes and can create a challenging environment for investors. Stagflation is an economic cycle characterized by slow growth and a high unemployment rate accompanied by inflation. Economic policymakers find this combination particularly difficult to handle, as attempting to correct one of the factors can exacerbate another.

For example, if unemployment were to go up to about 5% and consumer price index inflation were also at above 5% in 2023, that would be a kind of stagflation, though not to the degree we experienced in the 1970s, he said. Stagflation is a term coined in the 1970s when there was simultaneous high inflation and economic stagnation or high unemployment, according to Jonathan Wright, professor of economics at Johns Hopkins University. Since recessions are more common than periods of stagflation, there are macroeconomic tools developed that help nations fight recessions. Stagflation occurs much less often, so it is considered a worse condition because standard recessionary tools are ineffective.

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.