What is Stagflation?
Why this blast from the past might be making a comeback.
Along with bell bottoms, tie dye and platform shoes, the 1970’s marked a turbulent era that included the Watergate Scandal, rising oil prices and skyrocketing inflation where interest rates hit the 20 per cent range. Moving forward to our present day, inflation is once again front and centre. And, what began earlier last year as speculation that higher than average inflation would only be temporary or transitory, the situation is evolving with growing evidence that something called stagflation may be taking root.
Inflation: A general increase in prices for goods and services causing the reduction of purchasing power. Slowflation: A high inflation environment where the economy is growing, albeit slowly. Stagflation: Persistent high inflation coupled with rising unemployment and stagnant economic growth.
Stagflation triggers Stagflation may be starting to weigh on the minds of many, with more people than ever searching for the term. Ongoing economic shocks related to the pandemic, supply chain disruptions and the Russian invasion of Ukraine are all partly responsible for pushing inflation higher. And consumers are feeling the effects most directly in rising grocery bills, at the gas pumps and increases in rent and mortgage interest rates. In response, central banks are attempting to cool inflationary pressures around the world by hiking interest rates.
The reason behind central bank policy of raising interest rates is that higher rates tend to discourage borrowing and encourage saving, with the ultimate aim of keeping inflation at a predetermined target. The immediate effect of interest rate hikes can be felt by consumers facing mortgage renewals, or other loan obligations tied to changing interest rates.
In stagflation modelling created by the Conference Board of Canada, the current scenario of high inflation and rising interest rates may continue to push prices higher. As consumers feel the economic pinch of higher prices, there may be demand for wage increases, which can force companies to hike prices on goods and services. The result could be a slowing to sputtering economy– which is the definition of stagflation.
Will stagflation become embedded in the Canadian economy? Time will tell. But in the meantime, understanding the impact of debt and interest rates on your household budget is more important than ever.
Speak to your advisor to learn more about the options that are available to help you withstand a rising interest rate environment.