Supply Chain Woes and a Stalled Recovery: How to Ride Out the Perfect Storm for Stagflation

The past weeks of financial news have focused some attention on the term stagflation, raising the question of whether the US and other world economies might be heading in that direction. But that begs the question. What exactly is stagflation? What are the factors that create it? And what should we be doing if it actually happens?

What is Stagflation

Stagflation is a unique combination of inflation, or a general rise in prices making the value of money less, and stalling economic growth. Normally when we think of inflation, it is accompanied by a growing economy. As more people get jobs and salaries rise the prices of goods and services rise to meet growing demand. As people have more money to spend, the value of that money decreases as everything becomes more expensive.  Under stagflation however, there is no corresponding economic growth. Instead, by some other mechanism, prices of goods increase and the value of money decreases but because there is no accompanying economic growth, people become increasingly unable to purchase the goods and services they need. 

What Causes Stagflation

In order for stagflation to occur, there has to be some reason for prices to go up without the economy also growing. In the 1970’s the US experienced stagflation after OPEC started an oil embargo against the US and some European allies creating an oil shortage in the US. Without the oil necessary for both transportation and energy, the price of many goods and services drastically increased. At the same time American manufacturing jobs slumped as competitors abroad, especially in Germany and Japan, began to outcompete their US counterparts. An especially striking example of this is in automobile manufacturing; US brands suffered during the 70’s leading to employment stagnation. More and more Americans shifted to work in the service industry, generally with lower pay and fewer benefits. Before the 70’s most economists involved in monetary policy assumed that inflation was always accompanied by economic growth and therefore increased employment. When inflation occurred in the 1970s along with stagnating employment, the term stagflation was coined to describe the scenario.

We are currently in a time when a once in a century pandemic has led to unprecedented supply chain issues. Factories around the world are backed up due to worker shortages and pandemic related health measures. The world’s transportation services that ship those goods and resources around the world are also facing similar backlogs. This has helped to further propel the price increases that started as a response to the economic recovery after the first pandemic related economic shutdown.

The booming recovery we were experiencing earlier in the year has since slowed. As pandemic relief funds are no longer being dispersed to the public and Delta and Omicron variant-caused spikes have resulted in a slowing down of the return to business as usual, economic growth is starting to lag behind the rate of increasing prices. But so far, prices have stayed high.

What to do in the Event of Stagflation

It’s too early to make a prediction of which way the economy will turn. Economic policy could help to spur more economic growth, supply chain issues may be resolved and help to lower the prices of some goods. But if inflation continues to run away while employment and the greater economy stagnate, it could be worth understanding some moves one can make during stagflation that can help protect one’s own personal economic well being.

When there is a specific reason for an economic slow down, it makes it slightly easier to identify which assets might be more immune to the woes of the larger economy. The global supply chain problems affect only certain products. For example, companies that have what’s known as an “infinite shelf supply” like those that provide software and other digital downloads or those that provide consulting labor have been much less impacted by the supply chain issues. Additionally companies that have the ability to oversee their entire supply chain from end-to-end, even if only in specific markets, have been able to control their own fate a bit more to weather these times. Because debtors win in inflationary environments, companies with extraordinarily high access to corporate debt can be a good target during these times. Finally, during any period where outside factors are having negative impacts on companies across many sectors, companies that provide essential services will be more robust as resources will be diverted to ensure they can continue to perform their essential services.

Stagflation is a rare phenomenon that economists once didn’t even know to be possible. It has arguably only been observed once in American history. There are many ways that the current combination of market factors could play out, but the world is more interconnected than it has ever been, and disrupting events have been taking place around the world at an alarming rate in the last year and a half. The broad adoption of what is known as ‘just in time’ supply chains, where goods arrive at the destination just as they are needed as opposed to the traditional practice of keeping products in inventory to cut costs has also increased the risk of supply chain issues. It would be prudent to at least have a plan in place should the unexpected events continue.