Runaway inflation has raised fears that the economy is headed for a return from stagflation, but a host of Wall Street banks, including Goldman Sachs and HSBC, believe there are still opportunities for investors to safely navigate this difficult time. context.
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Stagflation is a term coined in the 1970s when there was high inflation and simultaneous economic stagnation or high unemployment, according to Jonathan Wright, an economics professor at Johns Hopkins University.
While there were some nasty recessions back then, many economists don’t expect a return to anything like that now, he said.
“I think the sense in which you had stagflation in the 1970s is not in the cards at all,” Wright said.
However, high inflation is prompting the Federal Reserve to raise interest rates, known as monetary policy tightening. With that, it is “very likely” that the unemployment rate will increase “a little” from the 3.6% are nowWright said.
The result may be at least a mild recession, he said.
Stagflation can occur if a recession starts before inflation goes down to where the Fed wants it to be, Wright said. For example, if unemployment rose to around 5% and consumer price index inflation was also above 5% in 2023, it would be a kind of stagflation, though not to the degree we experienced in the 1970s, he said. the.
“It would certainly mean that the job market would be much less attractive than it has been,” Wright said.
In the short term, the job market may cool off simply because of fewer job openings, he said.
Although polls sound the alarm about stagflation, not everyone agrees that it is inevitable.
“It doesn’t seem like a high probability,” said Josh Bivens, director of research at the Economic Policy Institute.
To have stagflation, you need both high unemployment and high inflation at the same time, which Bivens doesn’t see as likely.
“If we had a situation where unemployment went up quite a bit, I think that would probably cause inflation to start coming down quite a bit,” Bivens said.
A more likely scenario is that if we end the year with a series of interest rate hikes by the Federal Reserve, we could be in a recession by 2023, he said.
“If that happens, I expect inflation to subside fairly quickly,” Bivens said.
People shop at a grocery store on June 10, 2022 in New York City.
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A combination of inflation and inflation contractionwhere product companies cut back on the content of everything we buy, it’s keeping people’s money from going as far now, said Ted Jenkin, a certified financial planner and CEO of oXYGen Financial in Atlanta.
Now, stagflation is also a possibility customers are asking about, Jenkin said.
“I think it’s inevitable that we’re going to go into a recession,” Jenkin said. “Whether it’s a mild recession or we go into stagflation will be the big question.”
Consequently, now is a good time to review your personal financial plan.
“This is the perfect time for people to batten down the hatches and shore up the foundation of their financial house,” Jenkin said.
Try to aim for at least six months of emergency spending in case a recession hits, he said. Also make sure you have prepared a recent budget to see if there are places you can cut back.
Also, take a look at any adjustable-rate debt you may have (credit cards, mortgages, student loans) and see if you can reduce those balances or refinance them. Now that interest rates are about to go up, those balances are going to get more expensive.
Also, it’s a good time to invest in yourself to be more marketable professionally if layoffs become the norm.
“Make sure you’ve really brushed up on your skills and competencies or education so that if the job market gets tighter, you’re marketable,” Jenkin said.