Stagflation is a term used to describe a period of slowed economic growth and high unemployment, coupled with high inflation. While rare — stagflation last occurred about 50 years ago — it can pose a significant challenge for both the average household and economic policy makers. That’s because its symptoms are hard to manage simultaneously.
What it means:
A mashup of “stagnation” and “inflation,” stagflation is an economic state seemingly contradictory in nature. Textbook economics teaches us that when inflation is high (and therefore prices are high), employment and economic growth should also be relatively high. Before 1965, when the term was first coined, this was a reasonable expectation. After all, if prices were going up, it was generally because people were employed and spending more than usual, spurring economic growth. The relationship between employment and inflation, however, is not always balanced and the economy can slip into periods of stagflation when other factors come into play. There are a few ways this can happen. We may even be watching this process play out in 2022: If a critical resource or supply — like oil — is constrained by some external influence when inflation is rising, the overall economy slows and employment falls, but prices don’t.
We haven’t really experienced true stagflation since the 1970s, but some economists fear it’s a possibility. They point to the pressure the Russia-Ukraine conflict has put on the global supply of oil and natural gas, and its potential to slow our economies. Leslie Preston, Senior Economist at TD explains that “we are hearing the term used today because there’s worry that the economy may be headed in this direction, but the current state of the economy does not fit the definition.” To help protect against the chance of future stagflation, the Bank of Canada has pursued a path of aggressive interest rate hikes in 2022. But some caution must be exercised: If interest rates get yanked up too quickly, consumer spending can be smothered, throwing the economy into a recession. Ultimately, like many aspects of economic policy, it’s a balancing act.
To find out more about Stagflation, including whether it really describes Canada’s economy right now and whether it could contribute to the risk of a recession, check out Preston’s conversation at TD Stories.