Stagflation, Recession, Unemployment: Predictions From Apollo’s Top Economist

Monetary and tax policies and increased market or production regulations could cause stagflation, as could international conflict and a government’s response to it. The decrease in supply from international trade, the shift in government spending, and the increased demand for certain commodities used in war could all raise inflation without necessarily expanding the economy. Stagflation is a double whammy of economic woes that combines lethargic economic growth (and, typically, high unemployment) with escalating inflation.

Because this economic event is so multifaceted, it’s difficult for policymakers to address. The causes of stagflation are varied and don’t always include the exact same factors. National and global economies are complex, and changes in one area can have ripple effects that impact other areas in seemingly surprising ways. However, historic stagflation lets economists study trends and come up with potential common causes that might indicate stagflation is coming. Fixed-income investors can turn to shorter-duration bonds and Treasury inflation-protected securities (TIPS), which adjust their principal to match inflation, to minimize the impact of rising inflation.

High Unemployment

This devaluation, while potentially making exports theoretically cheaper, often exacerbates domestic inflation by increasing import costs. In the 1970s, expectations about future changes in prices and about future economic activity became very important. When people expected inflation to go up, they would demand higher wages—what became known as wage-price spirals. You’d have higher inflation and then worker demands for higher wages to keep up with inflation, which would drive inflation higher.

When Prices Go Up

Authorities might opt to cut public spending to curtail demand and rein in inflation. Inflation expectations are the rate at which the public (consumers, businesses, and investors) expect prices to rise in the future. So, in a simplified picture, if inflation expectations rise by 1%, actual inflation tends to rise by 1% as well.

• A period of stagflation is a particular challenge for economists because levers that tend to alleviate inflation could worsen an existing pressure, like rising unemployment.
• He noted that the Fed has responded by maintaining interest rates at around 4.5% to mitigate inflation.
• This is also called “sticky inflation,” and we see it hover around essentials like food and fuel.
• Combined with economic growth of just 1 to 2 percent, this situation raised fears of stagflation, which could occur if the economy continued to stagnate as inflation persisted.
• Keynes explicitly pointed out the relationship between governments printing money and inflation.

Poorly made economic policies

Meanwhile, some economists believe the U.S. has already reached peak inflation. While Haworth and Bond agree that concerns about stagflation risks are warranted, current dynamics don’t yet constitute such a phenomenon. Whilst Endowus HK Limited (“Endowus”) has tried to provide accurate and timely information, there may be inadvertent delays, omissions, technical or factual inaccuracies or typographical errors. Another key asset class designed to protect against inflation is inflation-linked bonds. It’s always the right time to pay off high-interest debt, but there’s nothing like the high probability of stagflation to put the pressure on.

Monetary policy missteps

Due to various risks and uncertainties, actual events or results may differ materially from those reflected or contemplated in such forward-looking information. He adds 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.

Interest rates are typically cut to get companies hiring again and the economy back up and running, but that action can be dangerous when inflation is soaring. We’re left with people and companies strapped for cash at a time when higher prices to service their debts and obligatory purchases cost more and more each week or month. Stagflation combines the words “stagnant” and “inflation.” It describes a period of low to nonexistent economic growth coupled with rapidly rising prices. The term stagflation combines the words “stagnant” and “inflation.” Its first use is attributed to a British politician in the 1960s.

Excess demand

• This destructive combination can put households and businesses in a tight spot as incomes fail to rise as fast as prices increase, he says.
• Monetary policies involve central bank actions to manage money supply and interest rates.
• “The tariff policies and deportations that have been put in place, and the current budget bill being debated in Congress, are predicted to create inflation,” he said.
• Supply shocks can also be caused by labor restrictions which reduce output and raise unemployment and wages while causing prices to rise as businesses push the higher costs of labor onto consumers.
• The neoclassical idea that nominal factors cannot have real effects is often called monetary neutrality33 or also the classical dichotomy.
• So when stagflation looms, the Fed is caught juggling a double-edged sword.

“If growth slows and inflation reaccelerates, the Fed could find itself stuck in a box without a clear exit strategy,” he adds. “If anything is going to derail markets today, it will overwhelmingly be stagflation.” To combat inflation, the Federal Open Market Committee (FOMC) can raise interest rates, but doing so also causes households to cut back on spending because savings rates rise.

What is stagflation?

For individuals, stagflation means the double burden of shrinking job opportunities while the cost of living climbs—a combination that makes planning one’s financial future as perilous as stagflation is to counter at the national level. First named in the 1960s, stagflation shattered long-held economic theories when it emerged most dramatically during the 1970s oil crisis. With companies already planning layoffs, Americans faced the prospect of an economic challenge that generations of policymakers had largely avoided.

The three macroeconomic objectives of governments are to achieve low price inflation, low unemployment, and a high rate of economic growth. These objectives, when achieved, create an internal balance in the economy, but all three of these objectives are compromised during the period of stagflation. “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. This leads to layoffs and fewer job opportunities, causing unemployment to rise. These events caused inflation to spiral out of control and threw the economy into disarray, along with easy monetary policy that the American central bank, the Federal Reserve, pursued to lift employment. Very high interest rates and a difficult recession were necessary to restore order.

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Conversely, if inflation is too high, they can raise interest rates to slow demand and ease price forex scalping strategy pressures. A big policy change is going on with tariffs and trade policy, implemented by the federal administration. Individuals could conclude that policy changes of this type would lead to higher unemployment and potentially lower economic activity. At the same time, because the tariffs impact prices, we could see changes in prices—higher inflation.