Stagflation – “an ugly word for a nasty phenomenon”
Stagflation occurs when an economy has slow growth (or shrinks) at the same time as prices continue to rise. High inflation can be difficult enough for individuals and central banks to cope with, but it is particularly unpleasant when paired with slow or no growth. The eZonomics story What is … stagflation? describes it as “an ugly word for a nasty phenomenon”.
How the current environment compares
Some analysts believe some countries have been experiencing stagflation in the aftermath of the latest global financial crisis. But conditions are nowhere near as severe as the most cited example of stagflation – the 1970s. Then, oil prices sharply rose, depressing growth and fuelling inflation and unemployment. In the United States, for example, growth contracted in both 1973 and 1974, its inflation rate hit 14% and unemployment jumped to about 9%. In comparison, the US is currently growing slowly, with first quarter gross domestic product at 1.8%. The US Consumer Price Index measure of inflation rose 3.2% last month and unemployment was at 9%.
Protect savings from inflation
Savers facing stagflation can try to protect themselves against inflation. The eZonomics article Five tips for beating inflation may help. Tip four suggests considering index-linked investments – an investment tool explained further in a separate eZonomics article. More adventurous investors might try to hedge against inflation via investments related to commodities but the success of such strategies is the topic of debate.