The Greater Threat: Stagflation
And 80% of Economists agree its coming.
Good morning investors,
In the most recent Federal Open Market Committee meeting, Interest rates were raised by 75 basis points. That’s the most hawkish fed we have seen in 40 years. In fact, rates were not even raised this quickly in 2007-2009, coming out of the Great Recession.
With the aggressive tightening of monetary policy set in place by the Fed, in efforts to curb inflation and prevent a recession, Many (Not all) economists agree that stagflation may actually be the real threat to our economy. Not A Recession.
What is Stagflation?
In simple, stagflation is a combination of the two words stagnation and inflation.
It’s a fundamental malfunction of the economy, where economic growth( the rate of output of goods and services) stays the same or slows while the prices of goods and services continue to rise.
The lack of Economic growth combined with high inflation could lead to higher unemployment, and that’s where the real danger is.
The Danger.
A benefit of a potential future recession would be putting out the blazing fire that is inflation.
However, a recession is not the end all be all cure to inflation. As many as 80% of economists believe that stagflation is a much more probable threat.
If rate hikes are ineffective in bringing prices down, the sideways or downwards economic growth will cause companies to start laying off employees. This, in turn, will cause a spike in unemployment, thus creating stagflation.
To spell it out for you:
If prices are still high and rising when there is a decrease in the workforce, it will cause millions of Americans to be left scrambling to pay for everyday essentials with an even more limited budget.
This budget deficit in everyday consumers will contribute even more to slowing economic growth, and the cycle continues as companies try to fight lower demand by raising prices even further.
The risk of stagflation alongside a recession is growing more and more every day. The best thing you can do to prepare is to educate yourself so you will not be surprised when the inevitable does come.
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Have a great day, and remember to live in the moment.
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