How Is the Stagflation That Everyone Talks About?

September 21, 2021, | AtoZ Markets-The word stagflation was first adopted in the 1970s and corresponds to a period in which a country's economy does not grow, but instead shows a continuous increase in inflation. Read all about stagflation here. 

Stagflation is defined as a phenomenon that combines a rapid rise in prices with poor economic performance. The economic crisis caused by the coronavirus pandemic and low global economic growth is still simmering, and inflation expectations have already begun to rise.

Globally, stagflation is a consequence of the pandemic. This has been causing a slowdown in the global economy, and inflation expectations have been on the rise and that is what worries investors.

According to analysts, stagflation is one of the worst scenarios a country can have because high inflation levels would prevent the economy from recovering, which would generate a vicious circle.

What is happening in the United States?

During the COVID year, global consumer and producer price inflation fell. In some economies based on the manufacturing industry, there was even a drop in price levels (deflation). Also, "effective demand," as Keynesians like to call it, plummeted, with a sharp decline in business investment and household consumption.

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However, as the implementation of vaccines accelerates in advanced economies, and governments and central banks continue to inject credit money and direct financing for businesses and households.

The widespread expectation is that major economies will quickly recover investment, spending, and employment, at least in the second half of 2021.

Former Treasury Secretary Larry Summers and former IMF chief economist Oliver Blanchard have warned that the approval by the United States Congress of the proposed $ 1.9 trillion spending package, in addition to the $ 900 billion stimulus last year's dollars posed a risk of inflation.

Four Reasons to Worry About US Inflation

First, economic recessions triggered by pandemics tend to end more quickly than those triggered by financial crises.

Second, thanks to bailout packages and a strong stock market, household finances are in much better shape now than they were after the 2008 crisis. However, one might wonder whether the stock market's runaway rise benefits the 93% of Americans who do not have investments in stocks or large pension funds.

The other concern is that the US Fed will create an inflationary spiral through its 'loose' monetary policies. The Fed continues to pour huge amounts of credit money into banks and corporations and has also weakened its 2% annual inflation target to 2% average inflation for an indefinite period.

The problem is not inflationary overheating; it is whether the U.S. economy will be able to recover enough to approach so-called full employment.

The problem is the profitability of the capitalist sector of the U.S. economy. If it does not return to at least pre-pandemic levels (and it was near historic lows), there will not be enough investment to restore jobs, wages, and spending levels.

How to Solve the Stagflation?

The complexity of stagflation lies in the enormous difficulty of solving it.

To curb inflation, the measures to be taken are along the lines of curbing consumption. Higher interest rates increased taxation and reduced public spending help companies to lower prices to continue selling.

Faced with a scenario of economic stagnation, the actions carried out are aimed at reactivating the economy by increasing consumption. As there is more consumption, companies can raise prices and, as they have more profits, salaries increase and unemployment decreases.

For some experts, the solution for stagflation is to have labor flexibility, business taxation that encourages investment, and regulation with full investor protection guarantees.

Likewise, an abundant, diversified, and safe energy supply to be cheap, a less rigid commercial distribution, and education and training at all levels are more linked to effort and the productive apparatus.

Stagflation is a current phenomenon of concern to investors and markets. Learn and stay informed always with AtoZ


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