80% OF ECONOMISTS SEE ‘STAGFLATION’ AS A LONG-TERM RISK. WHAT IT IS AND HOW TO PREPARE FOR IT
CNBC - June 21 2022
- Stagflation is a term coined in the 1970s to refer to a combination of high inflation and high unemployment.
- Recent surveys show economists and fund managers see increased risks of stagflation on the horizon.
- There are steps you can take now to get in a better financial position in case stagflation or a recession does happen.
The next big risk to the U.S. economy may be summed up in one word.
And no, it’s not necessarily recession, though economists are evenly split on the risks one is coming.
Instead, 80% of economists in the same survey named stagflation as the greater long-term risk to the economy, according to the Securities Industry and Financial Markets Association. The next biggest risk they identified was deflation, with 13% of respondents.
Moreover, a recent Bank of America global fund manager survey found fears of stagflation are the highest they have been since June 2008. Stagflation is “by far and away the most popular description of what the economic backdrop will be in the next 12 months,” according to the report.
What is stagflation?
Stagflation is a term coined in the 1970s when there was simultaneous high inflation and economic stagnation or high unemployment, according to Jonathan Wright, professor of economics at Johns Hopkins University.
While there were some nasty recessions back then, many economists aren’t expecting a return to anything like that now, he said.
“The sense in which you had stagflation in the 1970s is not one that I think is at all in the cards,” Wright said.
However, high inflation is prompting the Federal Reserve to raise interest rates — known as tightening monetary policy. With that, it is “quite likely” the unemployment rate will rise “a fair bit” from the 3.6% it is at now, Wright said.
The result may at least be a mild recession, he said.
Stagflation may happen if a recession sets in before inflation has gone down to where the Fed wants it to be, Wright said. For example, if unemployment were to go up to about 5% and consumer price index inflation were also at above 5% in 2023, that would be a kind of stagflation, though not to the degree we experienced in the 1970s, he said.