The Spectre of Stagflation

A quick search in the News section of Google over the last month or so brings back pages upon pages of results predicting a period of Stagflation is in the offing.

It’s easy to see why; most of the signs associated with stagflation are currently present.

First, a reminder.

Stagflation is a portmanteau* of stagnation and inflation. It was coined in the 1960’s by British Conservative Party politician Iain Macleod, who is also reportedly credited with inventing the term “nanny state”. If he thought the 1960’s was a nanny state, it would be fascinating to consider what he would come up with now to describe the current state of affairs!

Stagflation is usually recognised as a period in the economic cycle typified by high inflation and unemployment, coupled with slow or no economic growth. This was epitomised by the 1970’s recession, characteristics of which are present today:

• Surging oil prices - TICK

• Rising energy costs – TICK

• Stock market volatility - TICK

• Rising unemployment - TICK

What we aren’t seeing right now is zero economic growth, with global GDP being pushed higher as the world continues to open up fully from Covid-19.

The 1970’s were also characterised by surging interest rates, and while we have just had a further increase from the Bank of England, its hard to see a return to even the mid-single digit rates we had in the early 2000’s, let alone the double digit rates experienced in the late 1980’s or worse still the late 1970’s which saw rates capping out at 17% in 1979.

Increasing interest rates have traditionally been the most effective tool to combat rising inflation so it will be interesting to see what alternatives Central Banks will employ in their stead.

* I had to grab my “Stuff You’ve Forgotten From School” book off the shelf to recall this was a portmanteau and got side-tracked refreshing myself on the differences between metaphors and similes.

So in summary, while the next 12 months could continue to be a rollercoaster, as long as the economy shows green shoots we should manage to avoid a 1970’s style.

Investors who have not put all of their eggs in one basket should be able to sleep like a baby.