Stagflation vs. Recession: It’s The Economic Equivalent Of A Perfect Game vs. A No Hitter
- The US went through stagflation in the 1970s, it’s the only time in our history.
- While we’re not officially in a recession, there are growing concerns about what the continued rate hikes will do to the economy.
- A recession and stagflation are bad news, but stagflation is worse because it means we’re experiencing high inflation and high unemployment rates.
We have all heard a lot about the possibility of a recession lately, but another lesser-known possibility is stagflation, though it’s rare for high inflation to be matched with high unemployment. Fortunately, the US economy only experienced stagflation once in the 1970s when the economy suffered under some extremely unique conditions.
While we’re technically not in a recession right now, it certainly feels like we’re not far off. According to economists, the resilient labor market helped us avoid an official recession. There are rising concerns about how continued rate hikes from the Fed will impact unemployment numbers. There are fears that with the cost of borrowing going up, companies will have to start laying off employees, which would hurt the labor market and possibly bring us into a recession.
If high inflation is matched with high unemployment and a slowdown in economic growth, then we could experience stagflation for the second time in history. We’re going to look at the differences between stagflation and a recession so that we can better understand these key economic terms.
Stagflation is a term that was introduced to the general public in the 1970s. It refers to a unique period in which unemployment and inflation are high but economic growth stalls.
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The actual word “stagflation” is a portmanteau of “stagnant” and “inflation.” You could say that stagnancy in the growth of GDP caused by high inflation results in stagflation.
Economists originally didn’t feel that a situation known as stagflation was possible since unemployment and inflation rates tend to move in opposite directions instead of increasing simultaneously. Now it’s known that even though stagflation is rare, it can have a devastating impact on the overall economy as we experience a recession where there’s still high inflation.
It’s challenging to find a general consensus from economists as to what could trigger stagflation. Stagflation can be attributed to extreme shock in the supply of food or energy, a quick expansion of the money supply in a country, and poor economic policies introduced by the government.
What’s the history of stagflation?
When did the US economy first experience stagflation? Until the 1970s, stagflation had never been documented in history. Then the US experienced 9% unemployment, a slowdown in economic growth, and double-digit inflation rates.
Some experts say that stagflation in the 1970s was the direct result of poor policy decisions that led to increased inflation matched with the supply shock of an oil embargo, an almost perfect storm for this unique economic situation.
During the early-1970s, the U.S. economy began to feel the impact of the expensive Vietnam War and the slowdown of the post-World War 2 boom. President Nixon attempted to fix the situation by devaluing the dollar and announcing freezes to wages and prices.
Then in 1973, oil-exporting countries cut off the supply to the U.S. with an oil embargo which led to immediate consequences in the economy. This was all combined with the high budget deficit caused by spending on the Vietnam War. Economic issues only grew worse from there as inflation and unemployment reached 5% every year from 1974 until 1982. Even though the oil embargo was blamed for devastating the supply chain, the actions of President Nixon contributed to a dire financial situation.
Many who have written about this unique instance of stagflation believe that the Fed will try to act promptly in the future when it comes to limiting the rate of inflation because this painful period of high inflation saw two difficult recessions.
Why are there concerns about stagflation now?
While we haven’t seen stagflation since the 1970s, there are concerns that it could rear its ugly head again. In late 2021, The World Economic Forum revealed how Google searches and conversations about stagflation were creeping up due to rising oil prices and global supply chain issues.
The pandemic recovery has led to a unique scenario where economic growth has stalled as inflation rises. The world economy and demand bounced back sharply once pandemic restrictions were loosened, and we weren’t ready for it. Then to make matters worse, Russia invaded Ukraine, leading to even more unprecedented supply chain problems and problems with oil prices going up.
What’s a recession?
There’s an official definition for a recession and a process for declaring an official recession. The textbook definition of a recession is two consecutive quarters of declining GDP.
When it comes to the official declaration of a recession, the National Bureau of Economic Research (NBER) is responsible for making the call. The organization performs economic research, and they have a complex set of criteria that they consider.
We have experienced 11 recessions since 1948. The shortest recession occurred in 2020, when the pandemic officially started. Recessions occur naturally in an economic cycle because we go through periods of expansion, which eventually lead to periods of contraction. Recessions then occur as a result of a specific trigger or unforeseen shocks. The 2009 recession happened due to the real estate bubble bursting, while the 2020 recession was directly caused by the sudden COVID-19 pandemic that shut down the entire world.
Why has a recession not been declared?
While many economists were expecting a declaration of an official recession, it’s yet to happen. The reason for this is that economists from the NBER argued that the labor market has remained resilient, propping up the economy for now. The NBER also confirmed that GDP declined due to inventory issues caused by unique supply chain problems.
We have to wait and see how the Fed rate hikes will impact the economy. There’s a risk that the rate hikes could pull us into a recession. According to the Fed, there are unprecedented dynamics at play since there’s an ongoing war in Ukraine and various supply chain concerns. Despite this, the central banks will keep raising interest rates even with the threat of a recession on the other side of these rate hikes. Federal Reserve Chair Jerome Powell recently admitted that a soft landing is growing unlikely and that a recession may be unavoidable.
How can you tell if it’s a recession or stagflation?
Unfortunately, the impact of stagflation and a recession are felt long before an official announcement is made. And while a recession is typically predicted to last an average of ten months, stagflation is a terrible phenomenon that could go on for many years, as was experienced in the 1970s.
Stagflation is rarer than a recession as inflations occur naturally in our economic cycle. Many experts believe that stagflation is the worst-case scenario because it involves slow economic growth coupled with inflation, compounding prices for an extended period.
The worst aspect of stagflation is that families will have to deal with higher interest rates and higher prices, while the concern of job loss hovers over them.
How should you be investing your money?
During a recession or stagflation, finding investments that bring positive returns can be difficult. While it’s difficult to say with certainty what’s next for our economy, the signs are obvious that the economic downturn will continue as the central bank keeps raising rates to cool down inflation. For investors, it could be challenging to find assets worth putting your money into for fear of your portfolio going into the red. At the same time, it’s hard to sell if you already have investments because markets may rebound quickly and have already come down a bit.
We realize that even during the best times, investing in the stock market is risky, and often stressful. For a simpler approach, you can review Q.ai’s Inflation Kit and protect your investments from dropping in value. Better still, you can activate Portfolio Protection at any time to protect your gains and reduce your losses, no matter what industry you invest in.
When high inflation is combined with a period of stagnant growth in the economy, there’s pain felt across many industries. However, a recession or stagflation won’t impact every industry equally. As we wait for an official declaration of a recession, we must look for investment opportunities that could survive an economic downturn as we all brace ourselves for what may come next.
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