Stagflation is the ugly cousin of inflation. The last time that stagflation made an appearance on the world stage was in the 1970s. But the World Bank is warning countries to brace themselves for the return of stagflation, which is when economies experience a slowdown in growth at the same time as dealing with high inflation.
In theory, we shouldn’t have inflation when economic growth is on the back foot. After all, when economic activity is reduced, we would expect prices to fall in response. But the inflation that we are experiencing this time has not been caused by excessive demand. Instead, it is the result of a shocking increase in the cost of oil, supply chains that have been disrupted or broken, and a frightening rise in the cost of food.
So, what can central banks do? If they should cut interest rates to boost economic growth, then that could worsen inflation. If they raise interest rates to bear down on inflation, then that could worsen economic conditions to the point where recession could be a distinct possibility. Trouble is they can’t do both. They are caught between the proverbial rock and a hard place.
For now, it looks as though that they have decided to follow a Milton Friedman playbook, namely, to focus on inflation. The Nobel prize winning economist believed that all inflation is caused by an excess of money in the system. So, when too much money is chasing a limited supply of goods and services, then that will result in rising prices. Consequently, to bring down inflation, liquidity must be drained, which appears to be the preferred strategy of the US Fed.
In other words, interest rates will continue to move higher, regardless of the any negative impact that it might have on the economy. Don’t be fooled by talk about a soft landing. The landing will be anything but soft. Investors therefore need to be prepared for not just an economic slowdown but a prolonged period of rising prices. So, not only do we need to look for companies that produce goods and services that we can easily afford or can’t do without, we also need those companies that have pricing power, too.
If you’d like to learn more investing concepts, and how to apply them to your investing needs, sign up for our free investing education newsletter, Get Smart! Click HERE to sign up now.
Get more stock updates on our Facebook page. Click here to like and follow us on Facebook.
