{"id":574,"date":"2022-08-26T07:14:18","date_gmt":"2022-08-26T06:14:18","guid":{"rendered":"https:\/\/www.redstarwealth.co.uk\/blog\/?p=574"},"modified":"2022-08-26T07:14:18","modified_gmt":"2022-08-26T06:14:18","slug":"are-we-heading-into-stagflation","status":"publish","type":"post","link":"https:\/\/www.redstarwealth.co.uk\/blog\/are-we-heading-into-stagflation\/","title":{"rendered":"Are we Heading into Stagflation?"},"content":{"rendered":"<p>We all hear the word \u2018inflation\u2019 so much that you\u2019re probably sick of it. However, stagflation seems to be a topic less talked about. With the risk of stagflation having increased in the UK, we think it\u2019s important to have a quick rundown of what this actually means<\/p>\n<h2>The Different Types of <em>&#8216;<strong>-flation<\/strong>&#8216;<\/em><\/h2>\n<ul>\n<li>Inflation- a general rise in prices, meaning you get less for your money<\/li>\n<li>Disinflation- a fall in the rate of inflation. Prices are still rising but at a slower rate<\/li>\n<li>Deflation- a general fall in prices<\/li>\n<li><strong>Stagflation<\/strong>-persistent high inflation, coinciding with high unemployment and slow economic growth. It is a combination of both \u2018stagnation\u2019 (slow growth, no wage increases and high unemployment) and \u2018inflation\u2019<\/li>\n<\/ul>\n<h2>Stagflation is a Rareity<\/h2>\n<p>Until the 1970s, most economists shared the belief that inflation and unemployment have an inverse relationship. This means that when inflation increases, unemployment tends to decrease. However, we now know this is no longer the case<\/p>\n<h2>What Happened in the &#8217;70s?<\/h2>\n<p>We haven\u2019t faced stagflation since the 1970s. This economic situation was caused by the oil crisis acting as a supply shock<\/p>\n<p>The oil crisis meant the UK and US could no longer import oil from the Middle East. Continued strong demand with a huge restriction on supply meant that oil prices shot up by a whopping 300%<\/p>\n<figure id=\"attachment_582\" aria-describedby=\"caption-attachment-582\" style=\"width: 529px\" class=\"wp-caption aligncenter\"><img loading=\"lazy\" decoding=\"async\" class=\" wp-image-582\" src=\"https:\/\/www.redstarwealth.co.uk\/blog\/wp-content\/uploads\/Screenshot-2022-08-14-at-12.39.01-600x437.png\" alt=\"\" width=\"529\" height=\"385\" srcset=\"https:\/\/www.redstarwealth.co.uk\/blog\/wp-content\/uploads\/Screenshot-2022-08-14-at-12.39.01-600x437.png 600w, https:\/\/www.redstarwealth.co.uk\/blog\/wp-content\/uploads\/Screenshot-2022-08-14-at-12.39.01-800x582.png 800w, https:\/\/www.redstarwealth.co.uk\/blog\/wp-content\/uploads\/Screenshot-2022-08-14-at-12.39.01-768x559.png 768w, https:\/\/www.redstarwealth.co.uk\/blog\/wp-content\/uploads\/Screenshot-2022-08-14-at-12.39.01.png 808w\" sizes=\"(max-width: 529px) 100vw, 529px\" \/><figcaption id=\"caption-attachment-582\" class=\"wp-caption-text\">Demand and supply diagram by Red Star Wealth<\/figcaption><\/figure>\n<p>&nbsp;<\/p>\n<p>As shown by the above diagram, when supply restricts, prices are pushed up<\/p>\n<h2>What Causes Stagflation?<\/h2>\n<ul>\n<li>Supply-side shocks, such as labour shortages or the example of the 1970s oil crisis<\/li>\n<li>Certain fiscal and monetary policies, e.g, government spending being too high, or interest rates being too low<\/li>\n<\/ul>\n<h2>What Would it Mean for Us?<\/h2>\n<ul>\n<li>Stagflation would hit the average UK household hard; it would mean people\u2019s wages weren\u2019t keeping up with the price increases of goods and services<\/li>\n<li>It would essentially be a worsening of the current cost-of-living crisis<\/li>\n<\/ul>\n<h2>Once it starts, it is difficult to reverse<\/h2>\n<p>Managing inflation involves a reduction of the flow of money to reduce inflationary pressures caused by high demand. For example, the recent government decision to raise the interest rate to 1.75% is a way of trying to counter inflation<\/p>\n<p>On the other hand, managing a recession usually involves an influx of money into the economy to kickstart economic activity and encourage spending. Part of this could be lowering the interest rate<\/p>\n<p>Given that stagflation is a combination of both of these, it is very difficult to solve, as these are two completely opposite approaches<\/p>\n<p>Stagflation can be dealt with by dealing with the supply-side shock that caused it as quickly as possible. Then, action should be taken to reduce inflation before dealing with the stagnation aspect<\/p>\n<h2>Will we enter a period of stagflation?<\/h2>\n<p>In its latest Financial Stability Report, The Bank of England has said the outlook of the UK economy \u201cis subject to considerable uncertainty\u201d. Click <a href=\"https:\/\/www.bankofengland.co.uk\/financial-stability-report\/2022\/july-2022-\" rel=\"\">here<\/a> to read the full report.<\/p>\n<p>As discussed in one our <a href=\"https:\/\/www.redstarwealth.co.uk\/blog\/why-are-interest-rates-rising\/\" rel=\"\">previous blogs<\/a>, inflation is estimated to reach 13% later this year, meeting the first condition of stagflation<\/p>\n<p>However, the UK\u2019s GDP actually rose by 0.5% over the 3 months preceding April this year. This said, this growth could certainly end up being negated if there is a drop later this year caused by the cost-of-living crisis reducing spending. Additionally, whilst our unemployment rate is actually low, there are still labour shortages caused by Brexit and Covid reducing the size of our labour force<\/p>\n<h2>However&#8230;<\/h2>\n<p>The average inflation of Great Britain in 1975 was an enormous <a href=\"https:\/\/www.inflation.eu\/en\/inflation-rates\/great-britain\/historic-inflation\/cpi-inflation-great-britain-1975.aspx\" rel=\"\">24.11%<\/a>\u00a0so we aren\u2019t in the same boat yet<\/p>\n<p>We can\u2019t predict for certain exactly what will happen to the economy. At the end of the day, we aren\u2019t psychics or oracles! All that this info means is that the <em><strong>risk<\/strong><\/em> of stagnation has increased, not that it is inevitable and unavoidable<\/p>\n","protected":false},"excerpt":{"rendered":"<p>We all hear the word \u2018inflation\u2019 so much that you\u2019re probably sick of it. However, stagflation seems to be a topic less talked about. With the risk of stagflation having increased in the UK, we think it\u2019s important to have a quick rundown of what this actually means The Different Types of &#8216;-flation&#8216; Inflation- a [&hellip;]<\/p>\n","protected":false},"author":7,"featured_media":576,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_mi_skip_tracking":false,"spay_email":"","footnotes":"","jetpack_publicize_message":"","jetpack_is_tweetstorm":false},"categories":[1],"tags":[46,47,53,54,67,55,68,60,41,71,48,66,69,70],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v20.1 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Are we Heading into Stagflation? - Red Star Wealth<\/title>\n<meta name=\"description\" content=\"With the risk of stagflation having increased in the UK, we think it\u2019s important to have a quick rundown of what this actually means\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.redstarwealth.co.uk\/blog\/are-we-heading-into-stagflation\/\" \/>\n<meta property=\"og:locale\" content=\"en_GB\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Are we Heading into Stagflation? 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