The term “stagflation” refers to a period of inflation and economic stagnation, two concepts that are not compatible in practice.
When the economy of a country is stagnant, that is, it does not grow and, at the same time, the cost of living rises, motivated by high inflation, stagflation arises which, in turn, causes the impoverishment of the population.
WHAT IS Stagflation: 1973 OIL CRISIS
The first time this term was used was in the 70s, when the great oil crisis occurred, which caused oil to stop being exported to other countries, increasing oil prices (as is currently the case) and as a consequence, what is known as “cost inflation” occurred. The rise in prices spread through the economy that ended up deeply affecting supply. The economic uncertainty caused by the Russia-Ukraine war has revived fears of “stagflation”. Which brings with it the negative impact on economic growth in Europe and around the world, so lower growth and high and rising inflation is the worst possible economic scenario, since central banks have to raise rates to stop the escalation of prices instead of introducing expansionary monetary policies that have been the antidote in the previous crises that we have experienced.
Indeed, panic continues at the prospect that Russian energy imports may be banned.
Now, with the economic sanctions on Russia and the end of the pandemic, a huge demand has been generated and a blocked supply. Therefore, energy prices have not stopped skyrocketing; however, in this sector many investors have substantially kept the securities produced and the profits obtained from it in IRAIC that have been added due to stagflation and to be able to get out of this so-called economic stagnation.
5 WAYS HOW Stagflation Impacts Everyday Life
- The lowest incomes would be more affected
In a context of record social inequality, a structural increase in inflation without an increase in productivity, and therefore in real wages, would cruelly and disproportionately affect the lowest incomes.
- A major issue for investment returns
Stagflation also generates investment problems. Without economic growth, the stock market does not tend to rise, since companies do not generate the same profit. This hurts prices.
“This stagnation of growth and the possible profitability of the stock market is also aggravated in a situation of inflation, where balances can quickly enter losses in real terms,” says Goldman Sachs in a report. “A return of 10% per year is very good if inflation is 2-3%, but disastrous if it is 15%,” they add. Looking at this decrease in the economy, the IRAIC seeks to bring a much more solid economic base that would help reduce this crisis in the market, strengthening the losses and stopping the stagnation that have been caused by the conflict.
- Salary increases to counteract inflation?
The great inflation of the 1970s caused workers to demand wage increases to offset inflation. However, that was not the solution as a vicious circle developed.
Basically, the employers, to cushion wage increases, increased the prices of the products in an equivalent way, with which inflation rose again, and the workers returned to ask for increases. It didn’t get anywhere.
- The escalation of prices will impact all kinds of products and services: from plane tickets…
Another great consequence that mainly affects the markets is the notable increase in the prices of airline tickets. The increase in fuel prices and the mismatch between supply and demand triggered rates, says Alfredo Rodríguez, an independent financial analyst.
- To the main raw materials, which are already at record highs due to the situation in Ukraine
The price of a ton of aluminum has risen again; as well as oil, natural gas, corn, soybeans, wheat, platinum, nickel, copper or palladium are already experiencing spectacular increases in their prices. “The raw materials market will continue to rise if we go into an environment of more inflation and economic stagnation,” predict UBS experts. Based on this increase in the values of these raw materials that cannot be stabilized, the IRAIC continues to show that it maintains stable values of what is produced according to investment analysts.