What is stagflation, and why is it a problem?

Investing During Stagflation is a popular subject these days. People are worried and governments are trying to control inflation. but nothing seems to cure it.

In 1965, UK MP Iain Macleod came up with the word “stagflation,” which is a combination of the words “stagnation” and “inflation.” At the time, the economy was going through an unexpected period of high inflation and low growth. Macleod called it “the worst of both worlds,” and from a business point of view, he was right.

The first issue with stagflation is that workers are hammered twice by both increasing prices and slow growth. Their money devalues as possibilities decrease.

This idea has also been put into the “Misery Index,” which is a way to measure how unhappy people are. This is found by adding the unemployment rate, the lending rate, and the inflation rate and taking away the change in GDP per capita in percentage terms. With high prices and low growth, stagflation can push a country to the top of the list of worst places to live.

One of the most worrying things about stagflation is that it makes it hard for policymakers to do their jobs. In economics, it used to be thought that higher inflation usually meant unemployment was low and the economy was doing well. So, the only way to stop prices from going up was for the government to put the brakes on, either by raising taxes or interest rates.

When there is stagflation, the economy is already stuck, so governments don’t want to implement these policies that would slow the economy even more. This is also a big problem for economies that are still growing.

Gabriel Sterne, Head of EM Macro Research at Oxford Economics, says that if there is a stagflation shock, “the amount of fiscal effort needed to stabilize debt in Brazil and South Africa could be enough to cause significant political tensions.”

Stagflation can also make it hard for investors to make money. Strategies that work when inflation is high are harder to use when growth is slow, and even traditional “safe havens” can have trouble.

Is Stagflation what we think it is?

A Brief History

Even though the word “stagflation” was made up in the UK, the US also went through it in the second half of the 20th century.

In 1964, inflation was only 1 percent, and unemployment was 5 percent, which was pretty high. Ten years later, inflation was high at 12%, but unemployment was still high at over 7%, even though inflation was high. By 1980, inflation was close to 14.5 percent, but unemployment was even higher.

It seemed as if the traditional compromise of high inflation in exchange for low unemployment had completely broken down.

The United Kingdom (UK) had its own bouts of stagflation, the most infamous of which occurred in the 1970s. Stagflation is characterized by poor economic growth and excessive inflation at the same time.

what investments did well in the 1970s

Unanchored inflation expectations (there was no 2 percent inflation objective at the time), energy supply shocks, and increased bargaining power of employees leading to pay rises are some of the major variables that have subsequently been highlighted by the Bank of England as being significant contributors.

Given that some of these symptoms are still present in our society, it raises the question of whether or not we will soon enter another stagflationary phase.

Which are the safest asset during stagflation? The emphasis in the mainstream media right now is on drawing parallels between the economy of 2020 and that of the Great Recession and the Great Depression. Because these occurrences have such a positive ring to them, everyone allows them to become the focal point of their concerns over the economy. The unfortunate truth is that we are more likely to go through a protracted period of stagflation. The only way to survive in this challenging market is to have a solid understanding of what that term refers to and which assets do well in stagflation.

Customers need to manage their own funds in the same manner as a startup company. This requires keeping track of income vs. expenditure, in addition to managing operational and administrative expenses. The combination of rising costs and falling incomes results in margins that are as narrow as a razor. It seems probable that members of the working class are in a difficult situation, and the economic stimulus package proposed by the government is not likely to improve the situation.

This current book is for you if you’re seeking a way to go ahead in this economy and don’t know where to start. We are going to discuss what it means to be in a stagflationary environment, how it comes about, and the kinds of assets that do particularly well under these circumstances. Let’s begin by defining the phrase so that you have a better understanding of what it is that we are discussing.

Stagflation,During Stagflation what investments did well in the 1970s?

Anyone who was alive in the 1970s won’t be shocked to hear that the energy industry saw a boom at that time. It’s possible that the success that real estate investment trusts (REITs) had is less commonly recalled. These figures, by the way, showed property-owning REITs but did not include mortgage REITs, which are financial institutions that hold loans.

However, there are two exceptions to this rule. The first thing to point out is that it is not surprising that energy stocks fared well since the emergence of OPEC and the two oil embargoes that it placed on the West for political purposes were a primary factor that contributed to inflation in the 1970s. Cue Heraclitus.

But: There is no specific reason to expect that the subsequent increase in inflation will be the same as the previous one.

What happens to real estate during stagflation?

If you are not currently involved in the business of investing in real estate, this might be a stumbling block for you. After all, we have said that the present “cost-push” inflation that is being experienced in the real estate market is being brought on by the lack of available inventory. And you’re absolutely right.

Investing in real estate is an enterprise that is both extremely competitive and becoming more costly. Despite this, one should not assume that it is impossible to come across excellent chances. Investors need only broaden their perspectives to take into account emerging markets and opportunities. Although the market may be more difficult to manage, there is no denying that there are prospects for generating wealth over the long run.

How can stagflation hit traditional investments?

The most significant issue stems from the “inflation” component of the stagflation phenomenon; specifically, the phenomenon in which increasing prices result in a decline in the purchasing power of a currency. First and foremost, this presents a challenge for income stocks. If dividends do not rise at the same rate as inflation, income investors will be worse off in the long run, and there is a possibility that they may sell their holdings.

The “stagnation” component of stagflation also creates its own unique challenges for the stock market. When an economy enters a period of poor growth or recession, sales also slow down, which lowers earnings and makes it less likely that dividends will be given at all.

Growth stocks are equally susceptible to losses during periods of stagflation. The value of growth companies is often predicated on projections of their future profits or what investors believe the company is capable of achieving over the course of a longer period of time. The value of these future profits is diminished as a result of high inflation, which in turn lowers the demand for growth stocks and brings the price of those stocks down.

When high inflation is paired with low growth, as we see in the phenomenon known as stagflation, it is possible that predictions of future profits may be decreased even more. The share prices of growing businesses might come under even greater pressure to decline as a result of this.

Therefore, the total effect of stagflation on bond prices is ambiguous, and it depends on whether market anxieties about inflation or fears about stagnation are more prevalent.

How to beat stagflation

Stagflation makes business difficult. Raw material prices and labor costs are rising due to inflation. The economy isn’t expanding fast enough and unemployment is increasing. The poor economy makes it harder to raise prices. Consumer spending may reduce revenue. Stagflation kills many small enterprises.

Here are seven ways managers may help their firm withstand stagflation.

Productivity increases.

Improve your company’s production to withstand stagflation. Invest in software or gear to automate operations and lower the number of personnel required to produce the same amount. New software or equipment may produce results quicker, with fewer errors and less waste.

Today’s technology can enhance corporate operations more than in the 1970s. AI is making software more productive and robots smarter and able to handle human activities, and AI is speeding up these improvements.

Cost-cutting

To counterbalance rising material and labor costs, they lower expenses. Can businesses save energy? Can the supply chain and delivery costs be improved? Can the company get discounts for volume orders or flexible delivery dates? Cost-cutting and inflationary pressures must be mitigated.

Price-check.

Stagflation allows for reevaluating pricing practices. Check whether other firms, especially in your field, are raising prices. Consider boosting pricing to offset rising expenses.

Build an emergency fund.

Minimize debt. If rates rise, replace floating-rate debt with fixed-rate debt. Floating-rate debt resets monthly, quarterly, or annually at a spread over a benchmark, such as the two-year Treasury note.

Improve receivables and payables.

Reduce late AR and push suppliers for longer payment periods to boost cash flow. NetSuite Enterprise Resource Planning helps management monitor inventory, payables, and receivables.

Start renting.

During stagflation, rents may rise as revenue falls. Invest additional cash in your business’s building.

Be acquisitive.

Many small and medium-sized enterprises will fail during stagflation. Survivors with financial freedom might investigate discount shopping. Going-out-of-business or cash-strapped companies may sell property or equipment at fire-sale rates. Consider buying land, equipment, brand names, or skilled employees. Consider merging or purchasing a rival to cut expenses, expand into new areas, or provide more goods or services.

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