Our topic for today is stagflation, which comes to us by merging two words: stagnation and inflation. Economically speaking, it’s adding insult to injury. Appearing when rising prices meet slow economic growth.
As you’ve surely already concluded, stagflation is a rough period for regular people and companies alike. It can cause a drastic fall in purchasing power, which then reduces purchasing volume. In turn, companies may choose to increase prices to try and force profits, causing more inflation. Soon, you’re caught in a vicious cycle of rising prices while earnings stagnate. On top of that, stagflation often also means higher unemployment rates.
It’s easy to see why we’d want to avoid stagflation at all costs, but how do we do that? Well, experts can only agree on a specific cause of stagflation. Some blame oil price hikes, others on poor economic policies, and a third group goes all the way back to the loss of the gold standard. In reality, it’s likely a mix of those factors and a bunch of others. One commonality between most views is that supply shocks can cause stagflation. As such, stagflation can be hard to predict and even harder to eliminate.
The silver lining is that it’s a rare occurrence. However, we did just have a supply shock with the COVID pandemic, and we’re still seeing lingering effects. Namely, many believe that our current state, and any modern economic downturn, shows signs of stagflation.
And while stagflation does impose a tough financial challenge on most of us, it’s not without its opportunities. Namely, with stagflation, markets usually fold under pressure. As such, it may be a good time to invest.
Of course, if you’re investing in such a period, you’re thinking in the long term. You may see your positions drop further than ever before. But if you believe markets always bounce back (which historically, they do), you can bank on your investments growing as soon as the economy becomes healthy.
So while times may be tough, if you’ve got some money saved, now, counterintuitively, it’s a fantastic time to invest.