What is 'stagflation,' and why is it considered a long-term risk by experts?

Written By: Nikhil Pandey | Updated: Jun 22, 2022, 09:50 AM(IST)

Stagflation is defined as an economy that is suffering both an increase in inflation and a stagnation in economic output at the same time. Stagflation was initially identified in the 1970s, when an oil shock caused fast inflation and significant unemployment in many industrialised economies.

Next big risk

Russia's invasion of Ukraine heightened fears that, as early as 2021, the world might be hit by a phenomenon that hasn't been witnessed in decades: stagflation. Stagflation fears have been exacerbated by recent actions by the US Federal Reserve and other central banks to combat the highest inflation rates in the century.

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Major economic threat

One word can sum up the next major economic threat to the United States.No, it's not a recession, though economists are evenly divided on the likelihood of one.According to the Securities Industry and Financial Markets Association, stagflation was named by 80 percent of economists in the same study as the bigger long-term risk to the economy. With 13% of respondents, they listed deflation as the next major worry.

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Fears of stagflation

Furthermore, a recent Bank of America global investment manager survey indicated that stagflation fears are at an all-time high, dating back to June 2008. According to the report, stagflation is "by far and away the most frequent description of what the economic background will be in the following 12 months."

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What is stagflation?

Stagflation is defined as a period of poor economic development and relatively high unemployment—or economic stagnation—along with rising prices (i.e., inflation). Stagflation is described as a period of high inflation that coincides with a drop in the gross domestic output (GDP).

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Is stagflation a possibility?

Despite studies warning of stagflation, not everyone believes it will happen. Stagflation necessitates both high unemployment and high inflation, which experts do not believe is likely.

According to analysts, a recession is a foregone conclusion. The main question will be whether this is a modest recession or if we are entering stagflation.

A more plausible possibility is that we will be in a recession by 2023 if the Federal Reserve continues to raise interest rates at the end of the year.

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How can you prepare for a recession or stagflation?

People's money doesn't go as far as it used to due to a mix of inflation and shrinkflation, in which product producers cut the contents of everything we buy.

According to recent surveys, academics and fund managers believe there is a greater probability of stagflation on the horizon.

There are things you can do right now to improve your financial situation in the event of stagflation or a recession.

In the event of a downturn, experts recommend setting aside at least six months' worth of emergency funds. Also, make sure you've recently established a budget to see if there are any areas where you can save money. Furthermore, if layoffs become the norm, now is an excellent opportunity to invest in yourself to make yourself more marketable professionally.

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