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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.
Are we experiencing stagflation now?
Despite successive rate increases by the Fed, consumer prices have just begun to slow their ascent. The economy is just beginning to decelerate, but it continues to be very resilient. Employment remains strong with the jobless rate still low. So, the U.S. is not experiencing stagflation now.
Reversing high consumer prices requires a tricky balance of government intervention: putting the brakes on the U.S. economy just enough to ease consumer demand without falling into a recession or triggering stagflation. (Learn the difference between a recession and depression.)
The World Bank, an international provider of government loans, grants and other resources, believes global stagflation is a real possibility.
"Amid the war in Ukraine, surging inflation, and rising interest rates, global economic growth is expected to slump in 2022. Several years of above-average inflation and below-average growth are now likely, with potentially destabilizing consequences for low- and middle-income economies. It's a phenomenon — stagflation — that the world has not seen since the 1970s," David Malpass, president of the World Bank Group, wrote in a June global economic outlook.
The mention of "low- and middle-income economies" may lead us to believe that the U.S. economy could be spared from stagflation. However, two economists from derivatives marketplace CME Group believe America faces a similar threat of stagflation.
"No one wants a recession, and no one wants long-term, persistent inflation," CME economists Blu Putnam and Erik Norland wrote in a recent analysis. "Can the Fed negotiate a soft-landing for the economy in the face of these powerful risks? Only time will tell, but the probabilities of the U.S. economy settling into an extended period of stagflation have risen materially."
Meanwhile, The Conference Board, a nonpartisan, nonprofit economic think tank, also believes "periods of stagflation" — as well as a recession — are on the horizon.
"The Conference Board believes the U.S. economy is exhibiting stagflationary characteristics (weak growth and high inflation) and forecasts that a full recession will emerge before year end," Erik Lundh, a principal economist at The Conference Board, wrote in a report.
When did stagflation last occur? What's different today?
Stagflation dogged the American economy in the 1970s, as the country suffered through two recessions, stubbornly high unemployment and an elevated cost of living.
What's similar today to the stagflation era of the 70s through early 80s, according to the World Bank:
Supply chain interruptions are adding to higher consumer prices.
Rising commodity prices are contributing to higher costs.
Central banks are raising interest rates to reduce inflation.
What's different today:
These days, global central banks — including the U.S. Federal Reserve — are solely focused on lowering inflation rather than also attempting to preserve robust employment. However, the war in Ukraine and continuing complications from the coronavirus pandemic make the Fed’s massive, slow turn in inflation harder to steer.
The dollar is gaining value against foreign currencies.
Is stagflation the same as a recession?
Not really, but they are closely related. Stagflation occurs in a faltering economy with negligible growth, but the economy is not declining as in a recession.
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.