The concept of inflation is familiar to many, it can sometimes be felt even in a short round at the neighborhood supermarket. It is the same economic process in which prices rise continuously so that the purchasing power of money decreases, and for the same amount less products can be bought.
The economic process that reverses inflation is called deflation – a situation in which prices fall continuously as a result of a slowdown in economic activity, so that the purchasing power of money increases, although many times consumers also receive less wages.
But there is another economic process, less well-known and more rare, in which on the one hand prices rise but on the one hand the economy is in recession and unemployment is high. This process is called stagnation – a literal combination of stagnation (stagnation) and inflation – and is the one that worries the economic world in the midst of 2022.
So how does this happen?
It starts with inflation. The long closures following the corona crisis have caused disruptions in world supply chains and a shortage of raw materials, which has led to rising commodity prices. The war in Ukraine further intensified the process, with Russia and Ukraine being major suppliers of some of the important raw materials, and the result – inflation.
When inflation occurs, the world’s central banks have a key role to play in curbing it. They can do this with the main tool at their disposal – the interest rate. The higher the interest rate, the lower the prices. But interest is a device that works both ways, and the timing and power of its operation are critical. On the one hand, raising interest rates may help curb inflation, and on the other hand rising too steeply and too fast may weaken growth because the price of money – loans, mortgages – is rising, and this may lead to stagnation of demand and rising unemployment because a large part of manpower is no longer needed.
This is the crossroads that the economic world is in now, in the middle of 2022. It seems that the Federal Reserve, the US central bank and the most influential in the world, has delayed and inflation has “escaped” to levels that will be difficult to curb with moderate interest rate hikes. The interest rate aggressively risks stifling growth in the American economy and dragging it into a slowdown, while the prices of some commodities continue to be high.
How do you get out of this?
How do you get out of stagflation? It is a long and painful process, in which there is no choice but to choose one side of the equation – either to let inflation run wild in the hope that growth will also resume at some point, or to degenerate the economy into a heavy recession and then rehabilitate it cleanly, without debt.
For more guides on the Capital website:
Both inflation, recession and unemployment? This is called stagflation
How to invest in the dollar – all the ways, pros and cons
* The guide was written by the authors of the website Capital, Financial Guides. The information and data in the guide do not constitute a recommendation to purchase or sell any property; Nor are they a substitute for advice that takes into account the data and needs of each person.