Inflation vs Stagflation: What’s the Difference?

It included the economic stimulus package and record levels of deficit spending. People warned of the risk of stagflation if inflation worsened and the economy didn’t improve. One obstacle in the way of a stagflationary re-rerun is the modern global economy’s significantly reduced dependence on energy to generate growth. Others include the historically large U.S. budget deficit, interest-rate increases by the Federal Reserve, and modest inflation expectations shaped by decades of dowmarkets broker video reviews low inflation.

Employers have had more than 10 million job openings for a year and four months, adding 437,000 new job openings in September after slashing 890,000 in the prior month. “As the saying goes, the cure for high prices is high prices, and demand will likely adjust over time,” Hamrick says. Coryanne Hicks is an investing and personal finance journalist specializing in women and millennial investors.

In June 2022, Forbes magazine argued that a period of stagflation was likely because economic policymakers would tackle unemployment first, leaving inflation to be dealt with later. Whether stagflation will lead to a recession depends on the response of central banks to the periods of stagflation. Prior to the 1960s, the idea of stagflation was impossible to economists. Inflation and unemployment were thought to be polar forces since a high unemployment rate would mean there would be less to spend, and therefore, prices would fall or stay the same. Now the World Bank has downgraded its forecast for the global economy, citing factors including stagflation – a combination of slow growth and inflation. At the same time, Congress approved an expansive fiscal policy.

Stagflation and Phillips Curve

Before Zimbabwe easymarkets broker review experienced hyperinflation, the nation’s economy was stuck in a period of stagflation. In 1982, unemployment reached 10.8%, steadily rising until it hit 94% in 2008. Furthermore, in the 1990s, the government faced high national debt, a decline in economic output and export earnings and a lack of confidence in politics and the economy in general.

Is stagflation worse than recession?

• When energy costs rise, the cost of everything else follows — resulting in a supply shock.
• This steadily rose by the mid-1960s, as the Federal Reserve implemented monetary policies that were generally thought to maintain low levels of unemployment by keeping modestly higher inflation rates.
• This is changing and a storm is brewing with higher borrowing costs threatening to push leveraged households, companies, financial institutions, and even governments into bankruptcy and default.
• The increase was accompanied by a recession with negative 3.2% GDP growth and an unemployment rate that peaked at 9% in May 1975.
• These types of economic crises are difficult to defeat because the traditional play of lowering borrowing rates to stimulate growth is taken off the table.

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For the typical consumer, stagflation causes their purchasing power to decrease, making it hard to meet basic needs. In the 1970s, the oil shocks provided the backdrop for a rise in structural rates of unemployment as economies adapted to higher energy prices and growth slowed. Today there is a risk of that, but unemployment is still very low.

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In 2008, the Zimbabwean government printed so much money it went beyond stagflation and turned into hyperinflation. GDP by year to inflation by year, you’ll find stagflation in the United States occurred during the 1970s. What’s indisputable is that it took a pair of painful recessions to bring down inflation for good and legislation enacting larger U.S. budget deficits and economic deregulation to revive growth during Ronald Reagan’s presidency.

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“Don’t panic and do something foolish, still kind of stay the course,” Bond says. In addition to the World Bank, other major institutions—like Goldman Sachs and BlackRock—also warned about stagflation risks. And former Fed Chair Ben Bernanke said in May 2022 that the U.S. could be in for a period of stagflation.

But if stagflation is at play, deflation alone may not spur fast recovery because slow growth and unemployment issues must also be addressed. However, we’re not seeing signs of stagflation — at least not yet. We are seeing signs of slow economic growth, with real GDP declining at an annual rate of 0.6% in the second quarter of 2022. First, this GDP decline comes on the heels of rapid (5.9%) GDP growth in 2021 as the world started to normalize from the 2020 pandemic restrictions, so it is a comparison to the pent-up demand we saw in 2021.

But, generally speaking, these are the main potential causes of stagflation. The first public use of the term “stagflation” occurred in the British Parliament in the mid-1960s in reference to high inflation and unemployment at the time. Inflation isn’t necessarily a bad thing if it takes place during a period of strong economic growth, but the combination of inflation and an otherwise weak economy creates limefx a serious challenge from a policymaker’s perspective. As an example, in 2008 unemployment spiked to 10% as a result of the financial crisis in the United States, but inflation was above 5% for much of that year and the economy was clearly in a recession. If a fast-spreading strain of the bird flu affects a substantial portion of the chicken population, for example, that shortage could raise prices on eggs and meat just as much as it could reduce production and weigh on employment.

Inflation is the broad rise in the price of goods and services across the economy. For example, if inflation is at 5% and you currently spend $100 per week on food, the following year you would need to spend $105 for the same groceries. If there was such a thing as good inflation, “boomflation” would be it. It is inflation that occurs while unemployment is extremely low and economic growth is especially strong. For example, much of 2021 could be characterized as a period of boomflation. The average inflation rate for the year was 4.7%, but unemployment was steadily declining and GDP grew by 5.9%.

These types of economic crises are difficult to defeat because the traditional play of lowering borrowing rates to stimulate growth is taken off the table. A recession is generally said to be in motion when there have been two consecutive quarters of negative economic growth. Stagflation is much more open to interpretation because it’s rarer. Urbanist and author Jane Jacobs saw the disagreements between economists on the causes of the stagflation of the ‘70s as a misplacement of scholarly focus on the nation rather than the city as the primary economic engine. She believed that to avoid the phenomenon of stagflation, a country needed to provide an incentive to develop “import-replacing cities”—that is, cities that balance import with production.