Stagflation?

If you listen to any business news or investing podcasts, you’ve probably heard the term “stagflation” and perhaps been confused by what it is and how to prepare for it. The term is a blending of the words stagnation and inflation, meaning rising prices occurring simultaneously with a lack of economic growth.

Stagflation happens when a recession AND inflation occur at the same time. It’s typically marked by high inflation, high unemployment and weak consumer demand all at the same time.

Stagflation is a very rare occurrence, the U.S. has only experienced one sustained period of stagflation in recent history, in the 1970s. Defense spending on the Vietnam War coupled with the expansion of social welfare programs boosted federal deficits, the Arab oil embargo caused energy prices to soar, and a Federal Reserve that was slow to raise rates all combined to create a period of no economic growth but soaring inflation. Stagflation. The prime lending rate reached 21% and crude oil prices soared from $20 per barrel to over $125. Economists created the “misery index” during this period to quantify the economic pain caused by stagflation.

But this was a rare occurrence. A recession does not necessarily result in stagflation. Inflation alone doesn’t either. So why do we hear the term so much? Because of the tremendous economic damage stagflation caused in the 1970s.

The good news? Investors who properly understand and manage risk, who live within their means, and who avoid excessive debt are well prepared for the possibility of stagflation. If you have concerns about your portfolio’s exposure to stagflation or your current debt levels, let’s meet together and explore ideas to address your concerns.