What Is Stagflation? Are We Experiencing It Now?
A no-growth economy combined with high consumer prices compounds cost-of-living issues.
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High prices and a weak national economy are close to a perfect storm for consumers. With stagflation, households struggling to make ends meet face possible employment insecurity, too.
What is stagflation?
Stagflation is a mashup of the words "inflation" and "stagnation." It's when higher consumer costs merge with rising unemployment and little, if any, economic growth.
The Federal Reserve attempts to lower inflation by raising interest rates and slowing an overheated economy. However, stagflation can result if the economy stalls and prices don't fall significantly following the Fed's interest rate hikes.
Stagflation is not the same as a recession, but the two concepts are closely related. Stagflation occurs in a faltering economy with negligible growth. In a recession, the economy is declining.
The U.S. successfully avoided stagflation in recent years. Despite a prolonged period of high inflation following the COVID-19 pandemic, the economy has continued to grow and unemployment has remained low. The last time stagflation dogged the American economy was in the 1970s, as the country suffered through two recessions, stubbornly high unemployment and an elevated cost of living.
Are we experiencing stagflation now?
The U.S. is not experiencing stagflation now but the risk appears to be increasing. The annual inflation rate remains stuck above the Fed’s target rate of 2%. In fact, the Fed’s preferred inflation measure — the personal consumption expenditures price index, or PCE — came in hotter than expected in March.
Meanwhile, economists think the Trump administration’s broad tariffs will be a drag on the economy. The tariffs are expected to raise prices and spark a trade war.
The situation means the Fed has delayed cuts to the federal funds rate, even though it could help counter an economic slowdown, ING chief international economist James Knightley wrote in a note on March 28. “We are moving in the wrong direction and the concern is that tariffs threaten higher prices, which mean the inflation prints are going to remain hot.”
With only some of the proposed tariffs in place, investors, business leaders and consumers alike have become pessimistic about the future of the economy. That, too, could give rise to stagflation, since fear and uncertainty can lead to a pullback in spending at every level. That would further slow economic growth.
How can you prepare for stagflation?
Preparing for possible stagflation is much like getting ready for a recession or any other financial setback:
Save money. Build or replenish your emergency fund and keep that cash cushion handy, just in case.
Reduce debt. As the Fed continues to raise interest rates, the short-term cost of borrowing money — such as credit card debt — will continue to increase.
Delay major purchases and expenditures. Consider postponing significant outlays. In tough times, cash is king. (Though don't tap or interrupt your long-term savings accounts, such as investments for retirement.)
Keep career advancement opportunities in mind. With the job market tightening, it might be wise to keep your eyes open for ways to increase your employment value and your income.