What Is Stagflation?

By Coryanne Hicks Stagflation occurs when economic growth slows and the unemployment rate spikes. The 1970s are known for many things, but the one economists are most likely to recall is stagflation, the combination of high inflation and unemployment that can cripple an economy and investor portfolios. “Stagflation is a serious risk for investors because of its persistence,” says Michael Rosen, chief investment officer and co-founder of Angeles Investments. “That is, stagflation is rarely a transitory event and it erodes portfolio values over time, often marked by years.” Comparatively, the average length of all recessions since World War II is 11.1 months. “In one of the many ironies or paradoxes of investing that are counterintuitive, investors are well-advised to ignore important geopolitical events, such as a war or terrorist attack, as markets recover quickly from those events, and focus instead on the underlying drivers of the economy,” he says. “Stagflation, in that sense, is more impactful on portfolios than a one-off crisis.” What is stagflation? There’s an easy way to remember the definition of stagflation: Just think stagnant plus inflation. In other words, stagflation is stagnant economic growth plus high inflation, Rosen says. Economists also often add high unemployment to the recipe for stagflation. High inflation is fairly easy to understand as it’s nearly impossible to ignore. When inflation soars, prices rise. Anytime you drive by a gas station with its prices listed, you’ll be reminded of the impacts of inflation. READ FULL ARTICLE >>