What is Stagflation? – Small Business Trends


Stagflation is like an imperfect storm, a time that passes with many factors contributing to it. Stagflation is an economic condition caused by a combination of rising inflation and high unemployment rates, which cause a decrease in demand for consumer goods and services.

In a good economy, there is a balance, where slow and steady economic growth is in line with consumer demand. With stagnation, the economy is badly unbalanced.



What does stagflation mean?

Stagflation occurs when high inflation occurs at the same time as high unemployment. Despite recent growth in unemployment rates, the country still has about 2 million jobs far from employment figures in the days leading up to the pandemic.

The pandemic also caused problems that contribute to stagnation, such as supply chain problems. Lack of product contributes to inflation because rising prices are the result of consumers struggling to buy with insufficient supply.

To understand stagflation, economists look at the whole picture.

Is stagflation a recession?

What is stagflation, compared to recession? Unfortunately, and alarmingly, there are levels of stagnation. At worst, it is an economic cycle that can lead to a recession. Economic policy actions are being taken to combat stagnation, such as rising interest rates, as the Federal Reserve did in May and again in mid-June 2022.

However, when the federal reserve raises interest rates in an effort to fight inflation, this can worsen unemployment rates, as employers struggle to manage their businesses while facing higher costs. When inflation jumps and the federal reserve approves interest rate hikes, a period of stagnation occurs. Stagflation at its worst is a recession.

Stagnation vs. Inflation

High inflation and unemployment rates affect each other. Higher inflation means that the purchasing power of consumers decreases. They have less money to spend. When the money supply is adjusted for consumers, that is, when their dollars do not go that far, spending is reduced.

This poses a problem to companies. During periods of inflation, which lead to stagnation, real economic growth cannot occur. Economic research has shown that companies are suspending growth plans right now. Companies are also facing price pressures as their costs of supplies, utilities and loan capital increase.

Stamping Vs. Economic stagnation

Economic stagnation is a period without economic growth. It is a stage of stagnation, marked by rising prices for goods, including raw materials needed by companies and services. Many economists will agree that as periods of economic stagnation lengthen, the possibility of a recession increases.

What causes stagflation?

Most economists define stagflation as being caused by these five factors:

Negative GDP growth

GDP is the Gross Domestic Product, which is a measure of the country’s domestic production. Supply economists take into account the inflation rate when calculating real GDP. Over the last 2 years, GDP has been declining due to slow economic growth. Higher GDP growth indicates a healthy economy.

Another unemployment

Unemployment rates have been falling since pandemic restrictions eased, but the economy has not returned to pre-pandemic employment figures. At the same time, small firms were unable to compete for workers compared to the higher wages that medium and large firms could offer. The unemployment rate is low, but the U.S. still has 2 million fewer jobs than pre-pandemic levels.

Supply chain

The pandemic caused supply shocks throughout the chain, from production to delivery. As the economy faced a shortage of supplies, increased demand for items threw price controls out the window. Supply chain problems contributed to rising inflation.

Interest rates

The federal reserve raised interest rates in hopes of preventing inflation from reaching double digits and settling the economy. Inflation is a contributing factor to stagnation, as consumers and businesses have less money to spend. Discretionary spending decreases as money is allocated to needs, such as financial obligations and utilities. When the Fed raises interest rates, central banks soon respond by raising rates as well.

Inflation

High prices are part of inflation. Inflation affects companies, which pay more for public supplies and services. Its customers face the same challenges and reduce spending.

Stagnation and economic growth in the US

It’s not like stagflation is anything new. It can be part of the economic cycle of each government. The United States had a period of stagnation in the 1970s. Then-President Richard Nixon initiated a monetary policy that froze wages and prices for 90 days and levied a 10% tax on imports. Stagflation still reached its lowest point with a national recession.

How stagflation affects small businesses

Consumers and small businesses feel the pinch of stagnation. These are the main ways:

Rising prices

Small businesses pay more for supplies, utilities, and financial obligations. These costs are passed on as higher consumer prices, as companies are forced to raise prices. It is a compensation.

Rising oil prices

Rising oil and gasoline / diesel prices have reached historic levels. The inflation rate for oil and gasoline / diesel has been staggering. The country is facing an oil crisis, with the winter months to come.

Although unemployment rates are declining, the nation still has about 2 million jobs below pre-pandemic employment levels.

Rising interest rates

When the Federal Reserve raises interest rates, the central bank responds by raising interest rates. The cost of the capital loan is rising for small businesses. Many small business loans have variable interest rates. Rising interest rates increase the amount of monthly payments.

Supply chain problems

These problems will continue, as manufacturers struggle to find raw materials and also bear the costs of delivering the materials.

Consumer confidence

As prices rise, consumers reduce spending habits, especially on luxury items.

Preparing for stagnation

  • Refinance any loan with a variable interest rate
  • Buy a business credit card that has an interest-free business rate
  • Focus on customer relationships
  • Focus on relationships with suppliers
  • Pivot the business
  • Reduce expenses, such as travel

How does stagflation end?

There are three conditions that are part of the stalemate: flat employment growth, no wage increases, and a stale stock market.

Changes in economic policy can curb stagnation and possibly help the economy turn around. If all three conditions worsen, stagflation ends in depression.

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