First, before reading this article, know that every economic problem has a solution, both at the personal and macroeconomic level. So while there’s new talk of the economy going into stagflation, that doesn’t mean you’ll never be able to retire or run out of money.
But to be forewarned is to be fair-armed. There are also whispers that stagflation could be a problem, even though Federal Reserve Chairman Jerome Powell recently said there were no signs of stagflation in the economy.
What is stagflation? How could it affect your future financial security?
Let’s check it out.
What is stagflation?
Stagflation combines two very scary economic concepts: stagnation and inflation. Okay, but what exactly do these terms mean?
stagnation
Stagnation is a slowdown in economic growth, or the increase in the production of goods and services. And this trend can lead to high unemployment rates.
In its latest report on gross domestic product, the Bureau of Economic Analysis reported that inflation-adjusted gross domestic product growth was slower than expected. And while unemployment remains at historically low levels, the job market appears to be softening.
inflation
Inflation is an increase in the prices of goods and services.
Inflation is coming down from recent highs, but prices are rising more steadily than people expected.
stagflation
In other words, stagflation is a phenomenon that occurs when prices are high, there is little or no economic growth, and unemployment is high. This combination of factors can create fairly severe financial hardship for households.
The term was first used in the 1970s. Most economists say we are not at risk of stagflation at this point.
Stagflation is unlikely
At a recent press conference after the federal open market meeting, Chairman Powell was asked to comment on the risk of stagflation. Mr. Powell, 71, responded, “I don’t think of it as ‘stag’ or ‘flation,’ because I was in a period of stagflation.”
The number of unemployed people is increasing but remains low. Inflation is stable but appears to be declining. And many experts believe that the cause of the slowdown in gross domestic product is as follows.
And even if all the numbers go in the wrong direction, there’s still time to avoid stagflation.
Why is stagflation scary?
Stagflation can be scary because it’s difficult to fix. Traditionally, the job of correcting inflation (and stagnation) has been primarily the responsibility of the Federal Reserve.
But the tools the Fed can use to correct inflation – raising interest rates to slow demand – could worsen the economic downturn. And the way to fix stagnation (lowering interest rates to help businesses grow) could raise wages and worsen inflation.
Consumer and business sentiment, interest rates, investments, the job market, borrowing, consumer demand, spending, and prices are some of the factors that swirl in the vortex of stagflation.
“The only known solution to stagflation is a recession,” said David Wilcox, senior economist at the Peterson Institute for International Economics and the Bloomberg Economic Institute. (Well, that’s not good. A recession is when the economy shrinks.)
Stagflation can become a self-fulfilling prophecy
The real long-term problem with stagflation is that households and businesses suffer and feel uncertain about the future, leading to less spending and investment. This economic contraction will only perpetuate stagflation.
What to do if you are worried about stagflation
Just as stagflation is difficult for regulators to deal with, it is also difficult for individual households.The key may be to focus on flexibility In all aspects of finance: income, investments, spending, attitude.
suppress emotions
Approaching economics and money is not necessarily art. It’s not necessarily science. Most of the time, it’s an emotion.
Emotions such as confidence and attitudes such as optimism have a significant impact on economic performance. If you feel like your financial outlook is good, you’re probably spending more money and investing more. When you’re anxious, your purse strings tighten.
It is important to be cautious. Look for good things and opportunities.
Save and invest flexibly
It’s probably best to evaluate your asset allocation and make sure you have a diversified portfolio to guard against stagflation and future economic twists and turns.
Some people recommend having extra cash on hand in case of stagflation. Some suggest value investing (stocks in companies with strong underlying fundamentals). One approach is to invest in things that have actual value, such as products or real estate.
Income-producing investments may also be a good option. I Bonds have proven to be particularly popular. Bond ladders and fixed annuities (with inflation protection) can also guarantee returns.
Finally, some experts suggest avoiding middle-of-the-road options and considering a barbell approach that focuses on both very safe and relatively risky investments.
Be flexible with your spending
Cost cutting is a common response to inflation, economic stagnation, job losses, and stagflation. However, as explained above, cost cutting can perpetuate stagflation.
Taking a flexible approach to spending, cutting discretionary costs where necessary and spending where possible is probably the best approach. Stick to your budget. Monitor costs and adjust as necessary.
Look for more flexible income sources
Whether you’re already retired or still working, you may need to look for ways to diversify your income sources to protect against stagflation.
Passive income sources can be particularly helpful. Another option is to look for gigs or part-time work. Working longer and delaying retirement a little may be a practical solution.
Run a stagflation scenario in your plan
We don’t know what the future holds, but you can use NewRetirement Planner to run through what-if scenarios and assess your personal financial security under different possible financial situations. And no matter what happens in the economy, we’ll help you find opportunities to do better.
- How does adding flexible income or another investment plan affect the forecast?
- Have you set a budget for what you must spend and what you want to spend? Knowing where you can cut costs when the going gets tough will make you feel less anxious during an economic downturn.
- Try increasing your assumptions for inflation.
- Let’s see what happens when the income disappears.
- Evaluate different asset allocation options (change rates of return to reflect a “what if” portfolio).
- What impact will cost reductions have?
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