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Highlights
- Stagflation is generally defined as an economic scenario marked by continued high inflation, high unemployment, and stagnant demand.
- The term stagflation is a portmanteau of the words -- stagnation and inflation.
- The phenomenon was first observed in the UK and seven other major economies in the 1970s.
Stagflation is generally defined as an economic scenario marked by continued high inflation, high unemployment, and stagnant demand. The term stagflation is a portmanteau of the words -- stagnation and inflation.
The phenomenon was first observed in the UK and seven other major economies in the 1970s when surging inflation and dipping employment negatively impacted economic growth. As a result, investors in equity markets were severely hit.
What is stagflation? How to protect your investments from it
Of late, the term has once again started to appear in news headlines across the globe.
According to experts, stagflation has begun to emerge as a reality as inflation has remained stubbornly high since a few sectors struggled to find labour, some supply chains remain backed up, and energy costs rose sharply. The global economic growth has slowed after the initial rebound from coronavirus-induced restrictions. However, the other section of economists believes that it is too soon to think that stagflation has arrived.
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Interestingly, Google searches for the term stagflation have spiked amid signs of a global energy crunch. Oil recently surged over US$80 a barrel, the highest price in three years.
How to measure stagflation
Stagflation can’t be measured by a single data point. What is needed is the examination of various economic indicators such as rising unemployment and climbing prices over a period. The direction of these indicators is in aggregate. In addition, a broad-based surge in costs of goods and services can be an indicator.
What does stagflation mean for investors?
Investors who have lived within their means don’t need to worry much about stagflation. However, those with aggressive investments and non-diversified investments should look for decreasing their risk.
Experts advise investors not to panic during stagflation, sell stocks and bonds, and invest in safe havens and other commodities. The other important thing to note is to invest in a long-term financial plan to protect your finances.
Investors should also delay large purchases, including buying a house. However, if you are employed with a regular income, you should continue making regular purchases. You should also continue your saving habits.
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