WHAT IS STAGFLATION?
The Recession-Inflation
What is stagflation?
Stagflation is an economic event wherein inflation is high, supply chain shocks are suffered, economic growth slows down, energy costs rise, unemployment stays progressively high and normally when we have been though stagflation, the Federal Reserve turns hawkish. Such unfavorable conditions are feared by economists and can put massive pressure on governments because most actions designed to decrease the rate of inflation can also additionally increase unemployment levels, and regulations designed to lower unemployment, can also worsen inflation.
A politician while speaking in the House of Commons in the 1960s, named Iain Macleod, reportedly used the term “stagflation” for the first time. This was a time of monetary pressure in the United Kingdom, Iain was talking about inflation on one side and stagnation on the other, he referred to it as a “stagflation situation”. Later on, it was used again during the period of the 1970s when the oil crisis hit and when the U.S.A. suffered a recession that saw five quarters of negative GDP. In 1973 inflation doubled and then hit double digits in 1974. Afterwards by May 1975 unemployment reached 9%.
Stagflation brought about the misery index. This index, which is the simple sum of the inflation rate and unemployment rate, serves as a device to reveal simply how badly were people feeling when stagflation hit the economy.
How does it happen?
There is currently no consensus on why stagflation occurs, every economic school will have a different approach on how it happens. Although there are two widely known theories on the causes of stagflation.
Supply Shock Theory:
Stagflation can occur when the economy faces a supply shock, normally resulting in an increase in the price of oil. Such an unfortunate scenario makes also regular products more expensive since it is more expensive to transport them and slows the economic growth by making production much less profitable.
Poor Economic Policies Theory:
Stagflation can be caused by the government if they create policies that threat the health of its national currency, for example, to rapidly increase the money supply, as well as to create policies that can harm the economic growth. Both scenarios would probably have to arise simultaneously because policies that slow economic growth do not usually cause inflation, and policies that cause inflation do not usually slow economic growth.
Worst Performers
Cyclical areas of the market have suffered the most under high inflation and low growth conditions.
“Sectors such as building materials, construction, paper products and financial services experienced negative returns,” said Klement.
Oil equipment and production were also found to be in negative territory as the “demand effect coming from low growth” seems to have outweighed rising inflation.
“However, in the current environment, where inflation is mostly driven by higher energy prices, we would expect oil equipment and oil and gas producers to do rather well, due to the differing nature of inflation,” he added.
Best Performers
Sectors engaged in the manufacturing of food, beverages and household products, as well as utilities and pharmaceuticals, performed best.
“This confirms the lessons from the 1970s and early 1980s when these companies were among the best performers as well,” pointed out Klement.
Perhaps surprisingly, real estate has outperformed during these periods, as the positive impact of inflation-linkage in rental income outweighs the negative effect of lower demand growth.
(Klemont quoted from: https://capital.com/analysis-which-sectors-perform-best-during-stagflation)
