With sustained record inflation taking hold globally in 2022, crypto crashing, and the stock market entering bear territory, stagflation has become the hot topic. The Federal Reserve has to raise interest rates quickly enough to tamp down inflation but not trigger inflation or an even worse period of prolonged stagflation.
- What is stagflation?
- How do you beat or invest during stagflation?
- How does stagflation affect real estate?
- What are the differences between stagflation and inflation?
- How do we get out of or stop stagflation?
What is stagflation, and what causes stagflation?
Stagflation is a period of economic stagnation combined with high inflation. Stagflation generally occurs when there is a decrease in Aggregate demand(AD) and an increase in aggregate supply (AS). The decline in AD might be due to unfavorable government policies, natural disasters, or an oil crisis. On the other hand, an increase in AS can result from workers striking for higher wages or an increase in productivity. When AD decreases and AS increases, it leads to a fall in output and a rise in prices, resulting in stagflation. To combat stagflation, policymakers must use fiscal and monetary policy tools. For example, they can reduce government spending and interest rates to reduce inflationary pressures.
How a supply shock can cause stagflation:
How do you beat or invest during stagflation?
There is an ETF for that – it launched this week; check out the introduction for the link to Bloomberg. If an ETF is not your thing or you are already allocated, a few strategies can help you beat the market. First, focus on investments less likely to be impacted by inflation, such as real estate or precious metals. These assets tend to hold their value better during periods of high inflation. Second, look for companies that can increase prices without sacrificing demand. These companies often have substantial competitive advantages to pass price increases to consumers without losing market share. Finally, keep an eye on the overall economic picture and look for investment opportunities in sectors starting to rebound.
How does stagflation affect real estate?
On the one hand, high inflation rates could lead to more expensive properties, making it difficult for buyers to afford a home. In addition, unemployment levels tend to rise during stagflation, which could lead to more foreclosures and destabilize the housing market. On the other hand, stagflation can also lead to higher interest rates, encouraging more people to invest in real estate to preserve their wealth. Ultimately, the effects of stagflation on real estate will depend mainly on the economy’s overall health. If inflation remains under control and unemployment levels remain low, the real estate market will likely weather the storm relatively well. However, if inflation spirals out of control or unemployment reach record highs, the real estate market could experience significant turmoil.
What are the differences between stagflation and inflation?
Stagflation and inflation are two economic terms often used interchangeably, but they refer to two different phenomena. Inflation is a sustained increase in the price of goods and services, while stagflation combines high inflation and high unemployment. Both inflation and stagflation can damage an economy, but stagflation is generally considered more harmful because it results in lower output and higher prices. In addition, while inflation reduces the purchasing power of consumers, stagflation can lead to a decrease in production as businesses cut back on investment and workers lose their jobs. As a result, stagflation can be a challenging economic situation to overcome.
How do we get out of or stop stagflation?
There are several ways to get out of or stop stagflation. The most common method is through the use of government fiscal policy. The government does this by either increasing spending or cutting taxes to stimulate the economy. Another way to stop stagflation is through the use of monetary policy. This is when the central bank changes interest rates to encourage or discourage borrowing and thus help to boost or slow down the economy. Finally, another method that can be used is supply-side policies. The government implements policies to increase the economy’s supply of goods and services. This can be done through deregulation, tax cuts, or other measures that make it easier for businesses to operate.