Should we fear stagflation?
Stagflation – a toxic mixture of weak growth plus inflation – is rearing its ugly head again. Can we avoid it?


Ever since coronavirus vaccines arrived on the scene more rapidly than expected last year, the hope has been that economies could re-open quickly, households flush with savings would go out and spend, and we’d see a resurgence in growth to match the slide seen during global lockdowns. In the stockmarket, this particular bet was known as the “reflation” trade, with the companies hardest hit by lockdowns rebounding, while other “value” stocks such as miners benefited from surging demand for resources.
However, while growth has rebounded at a rapid pace, there are signs that the recovery might be running out of steam. The latest US nonfarm payrolls figures (a monthly measure of how many jobs are being added to the US economy) was hugely disappointing. And it’s just the latest sign that the Delta variant has thrown a spanner in the works of the re-opening process. As a result, we’re seeing more and more talk of an economic spectre that hasn’t reared its ugly head in 50 years – stagflation.
Stagflation (“stagnation” plus “inflation”) is an unusual and unpleasant condition in which the economy grows slowly or falls into recession, yet inflation stays high and rising. This makes it a central bank’s worst nightmare – they can’t raise interest rates to tackle inflation without squeezing the weak economy further, but they can’t cut rates to try to boost growth without fuelling inflation.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
So is it on the cards? We have argued for some time that we’re moving into a more inflationary world. But we’d hope that this would be combined with strong growth for at least a while. The main risk right now probably stems from any stalling in the re-opening process and employees returning to work. If that happens then activity and growth will take a hit, but supply chain issues will only get worse, partly due to labour market disruption. As Nouriel Roubini argued on Project Syndicate recently, we’re already seeing “mild” stagflation. The misery index (defined below) is running at double-digit levels due to high inflation and still-stubbornly high unemployment, levels not seen persistently since the late 1970s.
One thing is clear – investors should hope we can avoid it. Stagflation is mostly associated with the 1970s oil shocks, but Mark Hulbert in The Wall Street Journal notes that the stagflationary period actually ran from 1966 through to 1982, when then-US Federal Reserve head Paul Volcker helped to kill it off – at the cost of a huge recession – by raising US interest rates to double-digit levels. In that period, US stocks made almost nothing in “real” terms (ie after inflation), bond investors had to be very selective (avoiding long duration bonds in favour of medium and short-term ones), and even commodities – the classic inflation hedge – were mixed. Keep watching the jobs market.
John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.
He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.
His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.
-
December 2023 NS&I Premium Bond winners - check now to see what you’ve won
If you hold money in NS&I Premium Bonds, you can check from today (2 December) to see if you have won in the December prize draw. Here’s how to check.
By Vaishali Varu Published
-
OpenAI – corporate drama unleashed
OpenAI, the firm behind ChatGPT, was in uproar as its boss was booted out, briefly snapped up by Microsoft and then brought back again.
By Dr Matthew Partridge Published
-
Can Lidiane Jones be Bumble's perfect match?
Dating app Bumble is taking on Lidiane Jones, a well-regarded leader in tech, as its new boss. Can she work her magic in a new arena?
By Jane Lewis Published
-
UK millennials are worse off than previous generations
The evidence shows that millennials today are getting a raw deal. And, ultimately, that's a political choice.
By Simon Wilson Published
-
The rise and fall of Sam Bankman-Fried – the “boy wonder of crypto”
Why the fate of Sam Bankman-Fried reminds us to be wary of digital tokens and unregulated financial intermediaries.
By Jane Lewis Published
-
The jury's out on the AI summit at Bletchley Park
World governments gathered for an AI summit at Bletchley Park in November, but were they too focused on threats at the expense of economic benefits?
By Simon Wilson Published
-
As a market correction begins, money is on the move.
The force of a market correction is equal and opposite to the delusion that preceded it, so we can imagine that the correction will also be unparalleled.
By Bill Bonner Published
-
How small businesses can retain staff in a competitive job market
Small businesses are struggling to retain staff and compete against large companies with deep pockets.
By David Prosser Published
-
The French economy's Macron bubble is bursting
Cheap debt and a luxury boom have flattered the French economy. That streak of luck is running out.
By Matthew Lynn Published
-
K-pop hitman Bang Si-hyuk aims to repeat BTS phenomenon
Bang Si-hyuk created the world’s biggest boy band, BTS, making K-pop music a global sensation and himself very rich. Can he repeat the trick with a girl band?
By Jane Lewis Published