It’s no secret that inflation has made everything more expensive. Parents are struggling to keep food on the table for their kids, a roof over all their heads, and affording gas to go anywhere feels impossible. Now, according to economists, we have to worry about something called “stagflation.” But what is stagflation? Here’s what you need to know.
Economists have been forecasting what we can expect to come over the next year as we continue to deal with inflation rates that we haven’t seen in 40 years. Some have said that we will inevitably find ourselves in a recession. Still, not everyone sees that as being the next significant financial threat.
Instead, 80% of economists who took part in a Bank of America global fund survey named “stagflation” as the more significant long-term risk to the economy. Stagflation is “by far and away the most popular description of what the economic backdrop will be in the next 12 months,” the report warned.
What is stagflation?
Stagflation is a term that was first used in the 1970s to represent when high inflation is paired with high unemployment rates, Jonathan Wright, a professor of economics at Johns Hopkins University, told CNBC.
In the 1970s, the Middle East cut oil supplies to the U.S. and other countries, which caused a “supply shock” and increased the cost of oil in the U.S. four-fold. That caused stagflation because a recession set in before inflation went down. We’re at risk of that happening again — but not likely to the same extent.
How do we know if we’re in stagflation?
To officially be in stagflation, we would need to see both high inflation rates at the same time as high unemployment rates. CNBC explained an example Wright wrote: “if unemployment were to go up to about 5 percent and consumer price index inflation were also at above 5 percent in 2023, that would be a kind of stagflation.” However, the publication noted that the example wouldn’t be as bad as what happened in the 70s.
Ted Jenkin, a certified financial planner and CEO of Oxygen Financial in Atlanta, told CNBC that we’re very likely to see a recession — which happens when there’s a widespread drop in spending — in the coming months. “I think it’s inevitable that we’re going to hit a recession,” he said. “Whether this is a mild recession or we go into stagflation will be the big question.”
Which is worse? A recession or stagflation?
For non-economists, we’re probably asking ourselves which is worse: a recession or stagflation? The answer to that is slightly complicated because one hurts in the short term while the other can hit us harder for a more extended period.
“A recession is a normal part of an economic cycle and is painful as the economy slows and unemployment rises,” USA Today explains. However, a recession generally only lasts for a year, and not everything has inflated prices.
On the other hand, “stagflation is prolonged slow economic growth, with ongoing layoffs and high inflation.” Between high unemployment rates and inflation, people are spending even less, which can last way longer than we see in a recession.
How can we protect ourselves from stagflation?
Economists who spoke with USA Today said that parents could best protect themselves from a recession or stagflation by paying off as much credit card debt as they can. Parents should also consider converting to a fixed-rate loan to avoid increasing payments.
Finally, if there’s any money left over in your purse, invest in areas that have always held on, including agricultural goods, industrial metals, and energy products.