What Is Stagflation?

BY: Stanley D. Koopmans


Most consumers are all too familiar with the term inflation. But stagflation is a rare economic condition that few are familiar with, and even fewer have had to experience. An unfortunate reality during the 1970s and early '80s, stagflation combines high inflation with slow economic growth and high unemployment.

While the country is NOT dealing with stagflation at the moment, the term's prevalence in the media warrants a more in-depth explanation, as well as some steps both businesses and individuals can take to proactively protect themselves, should it become reality.

What You Need to Know

Stagflation is usually associated with both inflation and unemployment. While inflation is starting to affect consumers and businesses on a variety of levels, thankfully unemployment is still at almost record lows. And, in fact, the last time stagflation was a problem (roughly 40+ years ago), the government took steps to change relevant policies and regulations to significantly reduce the odds that it would ever happen again.

Yet, that word has been in the news recently. Why?

  1. Fear. Inflation has a spiraling effect. When prices go up, people tend to tighten their belts. Lack of spending slows the economy. Businesses produce less to avoid overstocks and unsold inventory, which creates demand and drives up prices. Inflation gets worse. And so on and so forth. Fear drives consumer behavior and can actually create the very problem we are trying to avoid. Learn more about that phenomenon and the direct effects of Covid on the economy in another article I wrote on the topic of inflation.
  2. The Russian invasion of Ukraine. One of the main instigators of inflation at the moment is higher prices for commodities, resources, and shipping from other countries. Both Russia and Ukraine are rich in natural resources that they normally export around the world. Right now, that’s simply not happening, so the limited supply of raw materials from elsewhere is driving up prices. Secondly, so many things are produced in China. Typically, China exports those products across the continent via railroad, which goes right through Russia and Ukraine. That supply route has been disrupted, making transportation take longer and cost more by either going around those countries or using water routes instead.

What You Need to Do

Whether you are a business owner or an individual consumer, there are steps you can take to help prevent “the spiraling effect” and also to protect yourself against the harsh consequences of a potential economic downturn.

  • Get more efficient. Rather than limiting your spending, consider every possible way you can eliminate waste. Contact Lake Ridge Bank’s Treasury Management professionals to help you find efficiencies of scale.
  • Evaluate your product quality. Past experience suggests that consumers will begin to look for higher quality products that last rather than buying “cheap” and discarding it quickly.
  • Make layoffs a last resort. Examine your operations to find ways to keep your employees. As a society and economy, we want to keep workers working and earning.
  • Utilize prudent financing. Talk to your business lender about options and scenarios.
  • View your business banker as a PARTNER. Keep your bank in the loop about big ups and downs so we can offer options that protect your company. Early conversations are best if things start to go sideways, but it’s never too late to bring us into the situation. We are here to help.
  • Be aware of financial predictions and trends. It is important to understand what stagflation is and that it could possibly happen in order to make informed decisions. Your business banker can share industry knowledge because we work hard to stay on top of trends and indicators.
  • Don’t panic. Panic and consumer confidence play a huge role in economic growth and prosperity.

In summary, Simon Sinek might have the best approach for navigating our next steps:

“Panic causes tunnel vision. Calm acceptance of danger allows us to more easily assess the situation and see the options.”

The big takeaway here is that we do, indeed, have options as business owners and consumers to trust the system and work in partnership with our financial advisors and experts to smooth out the bumps in the road.

If you would like to have a conversation about economic indicators and industry trends to learn more about your options, contact me or any of our business bankers. We are here to help.

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