Is Stagflation the Biggest Threat for 2022?

Between the growing inflation and economic stagnation, many experts worry about stagflation. Some even go as far as to say that it is the biggest threat for 2022. Meanwhile, others argue we can still stop stagflation from occurring. Take a closer look at the current stagflation threat, including its causes and potential risks. 

 

 

A Refresher on What Stagflation Is

 

Stagflation has three key characteristics: 

• Inflation is high.
• Economic growth slows (i.e., stagnates).
• Unemployment stays high.

 

Stagflation is incredibly challenging to overcome. If a government tries to reduce inflation, it is likely to accidentally worsen unemployment. On the other hand, efforts to improve unemployment tend to worsen inflation. 

 

 

Why Stagflation Is a Current Threat

 

Experts have pointed out numerous reasons to be concerned about stagflation. There are indications of all three elements required for stagflation. 

 

 

Unemployment

 

Compared to two years ago, there are four million fewer people working. The proportion of working-age adults actively in search of jobs or working is less than 62%. This is the lowest figure since the 1970s. 

 

 

Inflation

 

Inflation across sectors is high, affecting the prices of nearly everything, from cars to rent to food. Bloomberg recently reported that energy prices may surpass 6% inflation. The sanctions on Russian gas are expected to make energy- and gas-related inflation even larger. 

 

Unfortunately, the high inflation rates mean that central banks like the Federal Reserve have to increase interest rates. But this only worsens issues. 

 

 

Economic Stagnation 

 

The economic growth has been slowing as well. The figure last quarter was just 2.3% annualized. 

 

 

Causes Behind the Current Situation

 

The threat of stagflation, including unemployment, economic stagnation, and inflation, comes from several factors. 

 

Shutdowns, quarantines, and social distancing all had a significant impact. They made it much more challenging to produce goods, deliver merchandise, and provide services. Supply chain issues lead to rising prices and inflation. They also led to slowing economic growth. 

 

Many parents found themselves unable to work with schools closed or moving online.

 

The fact that governments had to reduce restrictions on certain benefits and welfare programs further disincentivized working. 

 

The war between Ukraine and Russia is also a significant factor. This is especially true given sanctions on Russia, combined with the fact that about 40% of European gas comes from Russia. 

 

 

Conclusion

 

Many signs point toward potential stagflation. The inflation rate, unemployment rate, and economic growth rates are all concerning. The pandemic played a large role, but it is far from the only one. Governments now have to carefully weigh their options to address stagflation and the long-term consequences it brings.