What is stagflation and how do you prepare for it?

Runaway inflation has raised fears that the economy is headed toward a return to stagflation, but a group of Wall Street banks such as Goldman Sachs and HSBC believe there are still opportunities for investors to navigate safely against this challenging backdrop.

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What is stagflation?

Stagflation is a term coined in the 1970s when there was high inflation and simultaneous economic recession or high unemployment, according to Jonathan Wright, professor of economics at Johns Hopkins University.

While there were some pretty bad recessions back then, he said, many economists don’t expect a return to anything like that now.

“The feeling that I experienced stagflation in the 1970s is not what I think is possible at all,” Wright said.

However, high inflation is causing the Federal Reserve to raise interest rates – known as monetary tightening. Still, Wright said it was “very likely” that the unemployment rate would rise “a little bit” from 3.6% as it is now.

The result, he said, could be at least a mild recession.

Wright said stagflation could occur if a recession starts before inflation drops to where the Fed wants it to be. For example, if unemployment rises to around 5% and CPI inflation is also above 5% in 2023, it will be a type of stagflation, though not to the degree we saw in the 1970s, he said.

“It will definitely mean that the labor market will be less hot than it used to be,” Wright said.

In the near term, he said, the job market may calm down once there are fewer job vacancies.

How likely is stagflation?

Despite polls that sounded the alarm about stagflation, not everyone agrees that it is inevitable.

“It doesn’t seem like a big possibility,” said Josh Bivens, director of research at the Economic Policy Institute.

To suffer stagflation, you need high unemployment and high inflation at the same time, which Bivens doesn’t see as likely.

I think it is inevitable that we will see a recession. The big question will be whether this is a mild recession or whether we have entered a stagflationary recession.

Ted Jenkin

CEO of oXYGen Financial

“If we had a situation where unemployment went up sharply, I actually think that would probably cause inflation to start coming down very sharply,” Bevins said.

The most likely scenario, he said, is that if we end the year with a series of Fed rate increases, we could be in a recession by 2023.

“If that happens, I would expect inflation to come down very quickly,” Bivens said.

How do you prepare for a recession or stagflation?

People shop at a grocery store on June 10, 2022 in New York City.

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Ted Jenkin, certified financial planner and CEO of oXYGen Financial in Atlanta, said the combination of inflation and deflation, as product companies reduce the contents of everything we buy, is making people’s money not go away now.

Jenkin said stagflation is also a possibility that customers are asking about.

“I think it’s inevitable that we’ll hit a recession,” Jenkin said. “Whether this is a mild recession or whether we enter stagflation is going to be the big question.”

Thus, now is the time to reconsider your personal financial plan.

“This is the absolute time for people to close the doors and shore up the foundations of their financial house,” Jenkin said.

He said he tried to target at least six months of emergency spending in the event of a downturn. Also, be sure to prepare a recent budget to see if there are places you can cut back.

Plus, take a look at any adjustable-rate debt — credit cards, mortgages, student loans — and see if you can trim those balances down or refinance them. Now that interest rates are about to rise, those balances are going to get even more expensive.

Furthermore, it is a great time to invest in yourself to be more professionally marketable if layoffs become the norm.

“Make sure you hone your skills and competencies or your education so that if the job market becomes tighter, you are marketable,” Jenkin said.

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