Stagflation is a period characterized by stagnant growth, high inflation, and a high unemployment rate. The situation becomes highly precarious, as attempting to rectify one factor can aggravate another. As a result, macro policymakers struggle greatly to handle it.
Although it was once considered impossible, the 1970s stagflation proved otherwise. Also, with the growing recession, inflation, unemployment, and other factors, economists are predicting a reemergence of stagflation. For this reason, it is vital to make careful changes and create a portfolio that will gain you profit.
Read on to learn more about stagflation and some of the stocks worth investing in during such challenging times.
Stagflation comes from two words—”stagnant” and “inflation”. British politician Iain Macleod coined the term in 1965. When an economy experiences stagflation, it has slow growth, high inflation, and a high unemployment rate.
So, unlike demand-pull inflation, where people have money to spend and can cope with increasing prices, during stagflation, a lack of supply leads to a rise in prices. However, people do not have money to meet these high prices.
Stagflation is very rare and only happens in unusual circumstances that drastically affect the economy. Also, as inflation and unemployment are two entities that move in opposite directions, economists once considered stagflation impossible. However, it has become quite repetitive after the 1970 oil crisis.
Generally, inflation has two root causes:
- Supply shocks
- Fiscal and monetary policies
So, when an economy faces a supply shock in goods, services, labor, or an incorrect fiscal or monetary policy, it can lead to stagflation.
During the 1970s oil crisis, there was a negative GDP growth in five consecutive quarters. This was brought on by the recession and accompanied by inflation. It was the only notable period of stagflation in U.S. history.
After the Second World War, in the 1970s, the inflation rate was already on the rise. When a series of oil supply shocks resulted in the tripling and quadrupling of oil prices, the inflation rate was affected further.
A series of preventive measures to protect the U.S. dollar followed the supply shocks. Former president Richard Nixon implemented these measures to remedy inflation and create better jobs.
However, these measures became the catalyst that sped up the stagflation process. Now known as the Nixon shock, the measures taken were:
- A 10% tariff on imports
- A 90-day freeze on wages and prices
- The removal of the U.S. from the gold standard
The Federal Reserve’s monetary policy only worsened the situation. It grew the money supply to achieve economic growth. However, the economic growth slowed considerably, and the US faced two different recessions that decade.
In conclusion, the US was subject to oil embargoes imposed by the Organization of Petroleum Exporting Countries (OPEC). This led to a rise in oil prices.
In response, companies increased the prices of the products, passing on the costs to the consumers. They also reduced production, which increased unemployment. All these factors led to an increase in inflation and slow economic growth, leading to the only stagflation in U.S. history.
While the US has avoided stagflation since 1970, there are concerns that stagflation may reemerge after the pandemic. As the economy is still recovering from the recession induced by the pandemic, economists are on the watch-out for any catalyst that could trigger stagflation.
So, what is one to do when the economy is in recession when people are earning less and spending more? In these conditions, adopting a stagflation investing strategy will help you create a portfolio that can give you maximum advantage.
The stocks you choose must have strong business fundamentals, positive analyst coverage, defensive in nature, and growth potential. Ideally, the stocks must rise in value along with inflation or must have a short maturity, as these are least affected by fluctuating interest rates.
So, the best stagflation stocks to target are:
- PepsiCo Inc
- Nutrien Ltd
- General Mills Inc
Stagflation is a period of reduced economic growth, high unemployment, and high inflation. Although rare, stagflation can be very challenging for citizens and the government. Measures to control the situation can go wrong, and the economy may face a hard blow.
In such times, having a solid portfolio that saves you from the disastrous effects of stagflation is a must. It will not only protect your money but also provide you with much-needed gains.