If you sell, you may be lucky enough to miss big market drops, but you will also miss out on the recovery. Volatile markets during economic uncertainty sometimes produce days with very high returns. Start by increasing your emergency fund to at least six months of expenses, which protects you if your income drops unexpectedly.
“In such economic conditions, businesses and individuals face difficulties in planning and making investment decisions.” For example, an easy monetary how to hedge against inflation policy where interest rates are being lowered combined with a tight fiscal policy can lead to wage retaliation if taxes remain too high. As workers demand higher wages, businesses may reduce employment and pass the higher costs onto consumers by raising prices. As businesses struggle to cope with rising costs and reduced consumer demand, they often resort to workforce reductions and hiring freezes to maintain profitability. High unemployment rates become a characteristic feature of stagflationary periods, exacerbating the economic hardship faced by individuals and families.
He also said that the full effects of Trump’s tariffs have yet to be felt and that markets are exhibiting an “extraordinary amount of complacency” in the face of those and other risks. During an economic downturn, high unemployment can make it harder to get back on solid financial footing if you have a sudden expense. If your savings cover at least three to six months of living expenses, you can more easily weather a financial storm without relying on credit cards or retirement savings. If a recession or stagflation materializes, it would be a “self-inflicted” injury resulting directly from US government policy, said Kathryn Anne Edwards, labor economist and independent policy consultant. A sustained drop (typically two consecutive quarters of negative growth) in the country’s total output of goods and services signals the economy is shrinking. Economic uncertainty and instability, like we see today, often trigger recessionary conditions, as companies and households start pulling back on spending and investment.
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It is usually accompanied by economic growth and declining unemployment rates. In contrast, stagflation combines inflationary pressures with economic stagnation and high unemployment. This further creates a unique set of challenges for policymakers and makes it difficult to tackle the problem. Federal Reserve Chair Paul Volcker guided the Fed through a vice-like tightening of monetary policy, raising interest rates dramatically (the federal funds rate peaked at almost 21% in 1981), to break the inflationary spiral. However, these policies helped spark two recessions in the early 1980s, with the unemployment rate reaching 10.8% in 1982.
Dimon’s comments follow Moody’s decision last Friday to downgrade the US credit rating. Moody’s cited the government’s ballooning debt, which could limit policymakers’ ability to maneuver a potential downturn. The downgrade, though mostly symbolic, comes as congressional Republicans push for significant tax cuts, projected to add trillions to the deficit.
Economists have been puzzled by the data in recent years, which suggests that significant drops in unemployment won’t necessarily lead to the same increases in inflation that the traditional Phillips curve would predict. Conversely, increases in unemployment haven’t resulted in as much of a decrease in inflation as they once did. Described as a potential “flattening” or “nonlinear” Phillips curve, this could make it even more difficult for policymakers to address stagflation. This economic framework led policymakers to focus primarily on managing the tradeoff between these variables (inflation and unemployment). When stagflation struck major economies worldwide in the 1970s, it upended not just the lives of many affected but the conventional economic wisdom, forcing a generation-long rethinking of macroeconomic theory and policy. Stagflation is an economic nightmare, both for those who live through it and the policymakers called on to solve it.
Labor Market Disruptions
- Whether or not future policymaking can steer the economy away from this outcome remains to be seen.
- The most famous case of stagflation occurred in the 1970s, after oil prices spiked and the U.S. economy suffered from high inflation and joblessness at the same time.
- Whether or not the U.S. will experience another bout of stagflation remains to be seen.
- The flip side is that with more money in the economy and in consumers’ pockets, prices can also rise, causing higher inflation.
- Stagflation could feel like a recession with the added pain of high prices, making it difficult to prepare for and even harder to navigate.
For instance, Treasury Inflation-Protected Securities (TIPS) and I bonds both pay more interest when inflation rises. Stocks related to kraken trading review commodities, such as energy, industrial metals, precious metals, and agriculture products, have historically done well in inflationary environments. As always, ensure any new investments fit within your overall investing strategy. The 2025 Trump tariffs have revived concerns about this economic phenomenon in a way not seen since the 1970s, with Federal Reserve officials warning about higher inflation alongside slower growth.
- This destructive combination can put households and businesses in a tight spot as incomes fail to rise as fast as prices increase, he says.
- Unless otherwise noted, the opinions provided are those of the speaker or author and not necessarily those of Fidelity Investments or its affiliates.
- In other words, the tariffs act as a supply shock, making it more expensive to bring goods into the country, with businesses then passing on those costs to consumers through price hikes.
- Stagflation, a rare economic phenomenon marked by stagnant growth coupled with high inflation, has significant implications across various sectors.
- Although there’s debate around the best ways to handle stagflation, the stagflation in the US in the 1970s and 1980s was addressed with large interest rate hikes from the Fed.
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The 1970s are known for many things, but the one economists are most likely to recall is stagflation, the combination of high inflation and unemployment that can cripple an economy and investor portfolios. As an example, in 2008 unemployment spiked to 10% as a result of the financial crisis in the United States, but inflation was above 5% for much of that year and the economy was clearly in a recession. The Motley Fool reaches millions of people every month through our premium investing solutions, free guidance and market analysis on Fool.com, top-rated podcasts, and non-profit The Motley Fool Foundation. “The Trump White House tariff policy has certainly increased the risk of both higher inflation and lower growth,” Brett House, professor of professional practice in economics at Columbia Business School, told CNBC. “The level of the tariff increases announced so far is significantly larger than anticipated,” Powell said in a written statement from his Chicago appearance that was published on April 16. “The same is likely to be true of the economic effects, which will include higher inflation and slower growth.”
Companies faced with higher costs had to either reduce output (leading to layoffs) or raise prices (feeding inflation), and many did both. The result was a toxic combination of rising unemployment and accelerating inflation that persisted throughout the decade. It can’t risk taking action to get ahead of potential tariff inflation for fear of hurting the labor market, and it can’t provide confidence-boosting interest-rate cuts for fear of reignited price hikes. In the absence of a central bank response, Americans could look to the federal government to try to ease some of the job market concerns.
Nevertheless, such actions may inadvertently elevate inflation and increase the tax burden. Consequently, tightening monetary policy and other strategies can also serve to slow down inflationary pressures. Stagflation significantly dampens investor confidence and undermines long-term investment strategies. Rising prices, tight monetary policies, and uncertain economic conditions make it challenging for businesses to plan for the future. Consequently, capital investment declines, hindering economic growth and perpetuating stagnation. These shocks occur when there is a sudden disruption in the availability or cost of key inputs in the economy, such as oil or raw materials.
Stagflation Looms: Why Economists Are Warning of a Rare and Painful Economic Storm
Since commodities prices are a direct input into inflation measures, they tend to rise during inflationary periods, particularly when inflation is driven by supply shocks. For instance, in the 1970s, oil prices quadrupled following the OPEC embargo, delivering significant gains for energy producers and commodity-focused investors. In other words, the tariffs act as a supply shock, making it more expensive to bring goods into the country, with businesses then passing on those costs to consumers through price hikes.
You can connect with her on Twitter, Instagram or her website, CoryanneHicks.com. With inflation reaching a 40-year high in 2022 and unemployment reaching the highest rate since the Great Depression in 2020, it’s natural to be concerned about stagflation in the U.S. However, both of these indicators have improved, with inflation ebbing from 6.6% in September 2022 to 3.0% in January 2025. Economist Larry Summers, a former Treasury Secretary, argued in a March 2022 op-ed in The Washington Post that the Federal Reserve’s current policy trajectory would likely lead to stagflation and ultimately a major recession.
Working-class and middle-class households generally experience the day-to-day hardship of a recession well before the National Bureau of Economic Research officially calls it. Folks on the margins also experience a much slower recovery after a recession is declared to be over. “There may not be an easy path to monetary or fiscal stabilization,” said James Galbraith, economics professor at the Lyndon B. Johnson School of Public Affairs at the University of Texas at Austin. Stagflation, a combination of stagnating growth and high inflation, is even scarier. Katherine Watt is a CNET Money writer focusing on mortgages, home equity and banking.
Stagflation, a rare economic phenomenon marked by stagnant growth coupled with high inflation, has significant implications across various sectors. During a recession, government and Federal Reserve leaders have several options to boost the economy, including lowering interest rates and implementing new programs to stimulate spending. Inflation is an economic measure of how the value of a currency changes over time. Central banks like the United States Federal Reserve, European Central Bank, and Bank of England typically aim for a 2% annual inflation rate. Stagflation may be rare, but it can hit your finances hard when it does happen. By taking a proactive approach, you can reduce the hit you’ll take during any kind of economic turbulence.
Economic stagnation is characterized by a significant slowdown or complete halt in economic growth, often accompanied by high unemployment rates, a decline in gross domestic product (GDP), falling wages, and other related issues. “Stocks have historically delivered high enough returns to beat inflation, but they often need economic growth to do that,” Martin says. When businesses are struggling to turn a profit, earnings expectations fall the no-spend challenge guide and with them, stock prices. It erodes consumer purchasing power and enforces difficult choices on households.
Lowering your monthly minimum required payments can help you manage a tough economic period. Though we aren’t there yet, wouldn’t we all feel a bit better with some extra cash flow? Profit and prosper with the best of Kiplinger’s advice on investing, taxes, retirement, personal finance and much more.
Investing
If unemployment is high, employers aren’t likely to lift wages to compete for easy-to-find talent. Stagflation could feel like a recession with the added pain of high prices, making it difficult to prepare for and even harder to navigate. Still, experts say you’ll want to take some of the same steps you would ahead of an economic downturn. When short-term bond interest rates become higher than long-term rates, it can signal that investors expect a weaker economy ahead. A significant and lasting drop in stock prices often reflects investor worry about the economy’s future.
