Is Stagflation Coming?

Higher prices and declining economic performance

Marc Guberti

--

Let’s talk about the current situation.

We have 7% inflation with no signs of it slowing down. It can get worse before it gets better. During their meeting, the Fed said they would start raising rates and soon stop QE. These measures would slow down the economy.

Higher rates increases the cost of borrowing money. Businesses will take out fewer loans because of the higher rates. Many businesses use leverage to expand. Look no further than real estate investors. Some of them live on leverage. Businesses may have to reduce staff to compensate for additional expenses.

The Fed’s current direction may be too little, too late. The Fed could have slowed down earlier, but now we’re seeing soaring prices. Their initial measures may not be enough to slow down inflation in the short-term.

They also told us inflation was transitory. This tweet encapsulates the Fed’s current predicament.

You won’t find much protection during stagflation. Inflation will decrease the purchasing power of your money. Storing it in the bank guarantees it loses value. That’s always been the case, but 7% inflation makes this fact more apparent.

Investments aren’t safe either. Higher rates hit on growth stocks hard because those high valuations are harder to justify. Some people see value stocks as havens. However, rising costs will affect any business and its ability to remain productive. Others see gold as sufficient protection, but that’s up to you.

We also have supply chain issues. We’ve known this for a while, but Tesla cited them in their recent earnings report (Tesla beat estimates which was good). Depressed revenue without a supply chain solution can spell trouble for many businesses.

Let’s also talk about the consumer. Many people are already making sacrifices. How soon before a significant percentage of the population buy fewer goods and services because of inflation?

Many people don’t feel good about the economy and inflation. These sentiments can lead to a self-fulfilling prophecy. Current trends don’t suggest people calming down anytime soon.

I’m a long-term investor who can wait several years. However, I’m more cautious about future investments. I’m not in a rush to take payments and throw them at stocks. To me, the current market feels like catching a falling knife. I could be wrong, but that’s my current stance.

Understand where you are financially and focus on career growth over investments. Long-term investors can wait for a turnaround. That’s how I’m navigating the current market conditions.

--

--

Marc Guberti

Personal finance freelance writer -- I write articles for clients on finance, digital marketing, and other topics