Stagflation: The perfect economic storm

• Author:
• Author name

  Quantumrun Foresight
• December 10, 2024

Insight summary

Concerns about stagflation are rising as slow economic growth, persistent inflation, and the possibility of higher unemployment combine to create a challenging environment. Some experts warn that inflationary pressures from energy costs, worker shortages, and supply chain disruptions could push governments and businesses to adapt policies and practices to counterbalance these effects. However, despite these risks, analysts suggest that strong consumer spending, low unemployment, and targeted investments in productivity may help the US economy avoid the worst impacts of stagflation in the near term.

Stagflation context

Stagflation represents a challenging economic situation where slow economic growth, high inflation, and rising unemployment occur simultaneously. The phenomenon, famously experienced in the 1970s, has resurfaced in economic discussions in 2023-2024, with concerns that conditions similar to that era may reappear. Economists point to factors such as inflation that remains above the Federal Reserve's target, geopolitical instability, and restrictive monetary policies as potential triggers for stagflation. In the first quarter of 2024, the US economy grew at an annualized rate of 1.6 percent, a slowdown from the previous quarter, while the inflation rate rose to 3.4 percent according to the Fed’s preferred gauge, the Personal Consumption Expenditures price index. This combination of high inflation and sluggish growth was considered troubling, as it could signal the onset of stagflation if unemployment also started rising.

Strategas Research Partners reported in February 2024 that inflation tends to come in multiple waves, with a potential second wave on the horizon for the US. Contributing to this inflationary pressure are ongoing worker shortages and housing scarcity, which keep wages and housing costs high. Rising energy prices due to the shift to renewable sources, coupled with global trade disruptions, have also created inflationary pressures. Historically, such conditions have made it difficult for central banks to reduce inflation without slowing economic growth, as seen in the 1970s when the Federal Reserve’s attempts to control inflation led to a recession.

Despite these concerns, some experts argue that stagflation is not imminent. The US job market has shown resilience, with low unemployment rates and strong consumer spending. According to a May 2024 analysis by the US Chamber of Commerce, the economy would need to experience considerably slower growth—below 1 percent—for stagflation to truly take hold. Moreover, technological investment and productivity growth may help sustain economic performance despite rising prices. While inflation could linger, the Federal Reserve projects a return to its 2 percent inflation target by 2026, suggesting that stagflation may not necessarily materialize in the near term.

Disruptive impact

Higher costs for essentials, such as housing, groceries, and energy, may force people to cut back on non-essential spending or find additional income sources. Additionally, slow economic growth can reduce job opportunities, especially for younger workers entering the labor market, which may lead to longer job searches and lower initial salaries. Some may consider relocating to areas with lower costs or remote work options as a way to manage these expenses. However, inflation could also encourage a shift in personal finance habits, as more people look into investing or exploring side businesses to offset rising costs.

Businesses might struggle to balance raising prices and retaining customers, which could push some to explore cost-saving measures like automation or outsourcing. However, specific sectors, such as discount retail and subscription-based services, could benefit from these shifts as consumers seek more budget-friendly options. Additionally, firms may rethink expansion plans, focusing instead on streamlining operations or investing in technologies to boost productivity. Although challenging, these adaptations could drive long-term changes in business models, encouraging more companies to adopt flexible pricing structures and value-driven products.

Meanwhile, governments may face long-term impacts on fiscal and monetary policies due to stagflation, which can strain public spending and social services. Policymakers may consider introducing targeted support for households and businesses most affected by rising costs, though this could increase national debt levels. Additionally, stagflation could shift trade policies as governments aim to reduce dependence on volatile imports and strengthen domestic production, especially for critical resources like energy and food. Some governments might also accelerate investments in green energy to address inflation linked to fossil fuels.

Implications of stagflation

Wider implications of stagflation may include: 

• - Rising costs leading to more shared housing arrangements, with extended families or multiple households living together to reduce living expenses.
• Businesses adjusting hiring practices to focus on part-time or gig roles instead of full-time positions, leading to a more fragmented workforce.
• Increased consumer demand for affordable, locally produced goods, encouraging companies to scale up regional manufacturing and reduce reliance on international suppliers.
• Governments re-evaluating energy policies to reduce inflation risks tied to fuel prices, which could accelerate clean energy incentives and infrastructure spending.
• Higher food prices pushing governments to support urban agriculture programs, encouraging city dwellers to grow their own produce and reduce grocery expenses.
• Increased public investment in affordable housing, as housing prices remain high, which could reshape urban development to prioritize mixed-income communities.
• Retailers moving to stock more essential goods over luxury items, responding to shifting consumer priorities and budget-conscious shopping habits.
• Politicians focusing more on economic stability in election campaigns, with promises to control inflation and protect household incomes from rising living costs.
• Younger generations delaying family formation or home purchases due to financial insecurity, potentially leading to lower birth rates and long-term demographic shifts.

Questions to consider

• How might rising costs impact your personal spending habits or savings goals over the next few years?
• What changes could you consider making in your daily life to prepare for shifts in the economy, such as food or energy price increases?