What is stagflation?

How does stagflation happen?

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Stagflation is caused by a shock to the global economy via world events. The fundamental principles of economics are disrupted: in normal times, when people spend less, prices go down. But stagflation leads to less spending and increased prices, which is at odds with modern economics. Here is how stagflation can happen:

• Oil prices. The world runs on oil imports and exports, and when oil prices go up (measured by cost per barrel), prices increase for transporting goods, factory production, and especially going to the grocery store.
• Global events. World events such as pandemics and war can disrupt the flow of goods, while embargoes against warring nations can lead to a recession.
• Supply chain issues. In the past two years, a shortage in semiconductors slowed down the manufacturing of everything from new cars to consumer electronics. Without this supply, spending fell alongside consumer confidence.
• Less employee hiring. Because everybody has to tighten their budgets, companies are more reluctant to hire employees or give raises. This leads to an increase in the unemployment rate and a decrease in wages.
• Investing losses. The value of stocks and bonds falls during periods of stagflation, and inflation can impact bonds that are tied to government spending.
• Poor policy. Governments and policymakers implement economic policies to avoid aspects of stagflation, such as lowering interest rates, increasing governmental spending, issuing stimulus checks or other ways to stimulate economic growth.

The average length of stagflation periods

The first use of the term “stagflation” was in Great Britain in the mid-1960s; back then, such a combination of slow growth and inflation was considered impossible. Yet in the 1970s, the Arab oil embargo and the ensuing energy crisis led to stagflation, with the first bout of economic misery lasting from 1973 to 1974, and the second from 1978 to 1982, as some experts believe.

What is the Misery Index?

The Misery Index is a combination of the inflation rate and the unemployment rate. The higher it is, the more miserable consumers are in terms of their ability to save and spend money. In June 1980, America’s Misery Index hit a high of 21.98; the current rate at the end of 2022 was approximately 10.

How to brace yourself for stagflation

You can reduce the impacts of stagflation by reexamining your monthly budget and reducing your spending.

Set up an emergency savings fund so you can handle unexpected expenses without impacting your existing savings accounts. Handle your debts with the highest interest so you can avoid paying more than you need. Learn to manage your living expenses and reduce your monthly subscriptions to save more money. Stagflation can be painful, but it won’t last forever. Yet, the ability to manage your finances can impart great habits for life—especially through Microsoft 365 and its budgeting tips and tricks.