explained | How are the fears of stagflation affecting the markets?

What exactly is stagflation?

Most economists typically focus on three major macroeconomic gauges to assess the health of the economy. Economic output as measured by gross domestic product, the level of unemployment, and thirdly, inflation, or the speed at which the prices of goods and services in the economy are rising.

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The challenge for policy makers, especially central banks, is to ensure optimal conditions whereby output grows at a healthy pace, helps businesses in the economy create jobs at a steady pace and thus keeps unemployment low, and most of all. Importantly, this all happens in an environment when prices remain relatively stable.

However, in the real world, more often than not, high economic growth always leads to rapid inflation, which is why many central banks have a specific mandate to ensure that the pace of price gains reaches a specified target level or range. It is not more than that.

The most difficult and messy problem for policymakers is when economic output either stagnates or, worse, shrinks, even when inflation remains high. A slowdown in economic activity, in turn, leads businesses to lose their jobs and the resulting situation is called ‘stagflation’.

How does it appear?

One of the classic examples when most economies, including the US, faced ‘inflation’ was when a sanctions led by the OPEC cartel of oil producers during the ‘Oil Shock’ in the early 1970s caused the price of crude to nearly double. quadrupled. under six months.

“Countries like the US that imported a lot of oil experienced both high inflation and recession,” wrote Veronica Doller, assistant professor of economics at SUNY Old Westbury in the US, in an article published by the online magazine. Conversation in March. “The consumer price index exceeded 10% for the first time since 1940, unemployment rose from 4.6% in 1973 to 9% in 1975, and GDP fell,” he observed.

What has sparked the latest concerns about stagflation?

While the outbreak of the COVID-19 pandemic and restrictions imposed to contain the spread of the virus caused the first major recent economic slowdown around the world, the latter took fiscal and monetary measures to reverse the slowdown, with most of the Contains substantial growth. Advanced economies fueled a sharp jump in inflation.

While the Fed and the Bank of England are among central banks that have begun raising interest rates to calm rising prices, the ongoing war in Ukraine following Russia’s invasion of its southern neighbor and the resulting Western sanctions on Moscow Have made a fresh and yet difficult-to-quantify ‘supply shock’.

With prices of all commodities from oil and gas to food grains, edible oil and fertilisers rising sharply in the wake of the struggle, officials face an uphill battle to control inflation which is no longer a function of demand (and therefore can be controlled by regulating credit) and is almost entirely due to supply factors which are far more difficult to manage.

To add to the concerns, several business leaders including Tesla’s Elon Musk and JPMorgan Chase & Co.’s Jamie Dimon are warning of an impending ‘recession’.

what is next?

Current Fed Chairman Jerome Powell asked at a Federal Open Market Committee press conference last month whether a recession was inevitable to contain inflation. “Basically, we have been hit by historically large inflationary shocks since the pandemic. It’s nothing like regular business… It’s a series of inflationary shocks that are really different from anything people have seen in 40 years. So we have to look at that and see the economy that is coming out from the other side. And we need to somehow find price stability out of it. And it’s obviously going to be very challenging.”