What is Stagflation?

Stagflation is like a sort of 'worst of both worlds' phenomenon. With stagflation, the economy is stagnant and not growing but there is also rampant inflation. So, in this scenario, the FED is not meeting its dual mandate on either front. The FED can sometimes force a hit to economic growth in order to stop inflation (inflation can be pretty dangerous in general) but in a stagflation environment none of the tools the FED has at its disposal are working. This most notably happened during a large part of the 1970s.

How Does Stagflation Affect the Average Consumer?

Stagflation affects consumers in that the price of goods and services are higher and there are more inflationary pressures throughout the economy. Because there is also less money flowing through the system, it’s more difficult to find employment and the economy may not be operating at full productivity. The inflationary pressures can be due to anything, they can be due to exogenous supply shocks and harder to acquire resources or they could be due to pent up demand. Whatever the case, it’s not something that is typically easy to get rid of when it gets situated in the economy. Which is also why the FED always makes it a point to prevent it from occurring whenever possible.

Stagflation is usually caused by a period in time where the money supply became far too large followed by a subsequent inflationary shock to the economy. This inflationary shock can be due to lack of resources globally or locally, supply constraints, excess demand of certain resources or goods, etc. The issue lies in that fact that once inflation rears its ugly head it can be hard to put that cat back in the bag. Moreover, inflation is often based on expectations, so it's not always within the FED's control if the general public is lacking trust of the government's ability to control inflation.

How Should Consumers Adjust?

There are only so many different ways consumers can adjust. When stagflation hits the economy it’s not always something that you’ll have gotten an opportunity to prepare for ahead of time. Unless you clearly see the signs that inflation might be sticking around for quite a while, it’s not always an easy adjustment to make. If you are looking for signs however, the FED will give the best signals and signs. In fact, FED talks are so important that there are many people, robots, AI, etc., all vying to understand and interpret the FED’s stance within as quick a timeframe as possible. They do this so they can quickly understand how to position themselves, their companies, their assets and their economic positioning. They have a difficult time doing this as well and they have much more resources at their disposal than consumers.

Consumers can prepare by doing what they normally do during periods of slow economic growth or how they would prepare during a bear market, the only difference being is that they can consider purchasing things ahead of price increases/changes (whether it’s due to tariffs, inflation, etc.). It would also be wise to purchase liquid assets that will retain their value so that in the event inflation gets out of control you have a liquid source of funds that will hold its value. Many consumers chose to do this by buying gold, silver, precious metals and now even cryptocurrencies and bitcoin.

Stagflation and Tariffs

Given any changes in global supply chain or other supply shocks, tariffs could very well have a significant impact on inflation and the economy. When supply shocks occur the combination of tariffs could lead to significant inflation in the short term. And as we have well seen in 2022 and recent years inflation can have a habit of staying around and becoming “sticky” once it’s ingrained into the economy. This is part of the problem with inflation, inflation is largely based on expectations, so when expectations for inflation are high, it becomes more difficult to get out of that negative inflationary feedback loop. Tariffs coupled with this loop can be quite detrimental to the economy.