inflation recession and stagflation

 

  The stock market has seen its worst first half in more than 50 years. Prices for necessities are steadfastly staying high.  and government assistance initiatives intended to sustain citizens during the pandemic is being terminated more quickly than sitcoms from the 1980s.

Many people's financial situations are riskier now than they were during the pandemic's purported peak. Just American expenditures on economic stimulus programs, when adjusted for inflation, equal the amount spent by the country on World War II defense.

While many of the traditional soundbites about debt and fiscal responsibility may be a little exaggerated, government budgets are significantly different from personal budgets.

A recession and excessively high inflation are our only options.

Both of these choices are undesirable, but they are undesirable in different ways and for various individuals.

So, when will our economy resume their previous state?  And is there any other choice available, or are we forced to choose between inflation and a recession?

The US inflation rate is right now 4.9% and it was 8.6% which was three to four times the Federal Reserve's goal rate and solidly within what we would classify as irrational terrain.

With a negative first quarter and most forecasts calling for another sluggish quarter of growth, actual growth has also been quite modest.

A recession is technically defined as two consecutive quarters of negative real GDP growth. Even though most institutions no longer apply that strict framework to determine whether or not we are in a recession, most economies around the world are likely already there, at least according to the most reliable definition that is now available.

So, there is an alternative to choosing between high inflation and a recession. This is referred to as stagflation by economists.

In the upcoming weeks and months, you'll undoubtedly start to hear this phrase used more frequently.

The word "stagflation" was initially used in the 1970s to refer to a time of low economic growth, high unemployment, and yet high inflation.

Low growth and high unemployment typically lower inflation because individuals won't spend as much money if they don't have work and are worried about the future.

Less overall demand exists in the economy if people spend less money. In addition, costs decrease as demand declines.

Stagflation typically indicates that the economy has experienced severe problems. It's as if you're drowning and dehydrating at the same time.

 and the likelihood is that we will have to deal with it. How terrible are both of these going to get is the actual concern now.   Let's start with inflation in order to respond to this question.

For two reasons, inflation is high at the moment. In spite of significant financial infusions into the economy over the previous two years, there have been serious goods shortages brought on by supply problems resulting from pandemic lockdowns, trade disputes, and now an Eastern European conflict.

Up until recently, the Federal Reserve Bank generally blamed problems with the supply chain for price increases in particular markets. Conveniently, since they only have direct influence over currency flows in the economy, this would absolve them of blame for inflation.

The Fed abstains from participating in lockdown or trade talks. The Fed has since reversed course on this issue, and its analysis now shows that income transfers which is simply a fancy way of saying all the additional money that was pushed into the economy during the pandemic were responsible for about 3% of the inflation rate.

Actually, 3% is not that horrible.  And the Fed itself swiftly adds that if these steps hadn't been done, we probably would have been seeing deflation, which would have been worse for a number of reasons.

if our inflation rate is 8.5% and the target rate is 2 to 3%.  So, the 3% brought on by stimulus measures accounts for 50% of the issue.

3% is likely to be revised upward, as even the Fed has acknowledged, but for now, it provides us with a solid standard to work with.

What, therefore, is responsible for the additional 3% of inflation that is currently above average? Certainly, there are challenges with the supply chain.

There is no getting around the fact that during the past 3 years, the way we conduct business and generate value to our economies has fundamentally changed.

But why are we truly only having this experience now?  In fact, industrial output has increased to record levels in the US, while imports have increased significantly to more than make up for supply shortages.

Supply chains played a significant role in the inflationary issue a few months ago, but there is now a little more to it. Of course, there are still some products that are troublesome, such as consumer electronics, food, and oil, and many of these have had negative ripple effects.

Nowadays, almost everything we consume must travel hundreds or even thousands of kilometers before it reaches us. If oil is expensive, then this transportation will cost more, which will eventually be passed on to consumers like us.

By reasoning along these lines, we can begin to identify the true origin of the extra 3%. Only 15 to 20% of the money we spend on food is spent on actual food, astutely noted Paul Donovan, chief economist at UBS Global Wealth Management, in a recent interview.

The remaining 80% goes on the transportation of that product from the farm to our supermarkets. This is largely made up of transportation costs, such as the fuel we discussed previously, and items like packing and processing, which have become slightly less efficient as a result of Covid regulations.

However, there are still two more significant costs that we must take into consideration when we purchase food, namely the profit margins of all the businesses participating in the supply chains and the wages of all the employees who made it possible.

All of this inflation has provided businesses with a fantastic opportunity to boost their prices while claiming to be merely keeping up with inflation.

In actuality, most businesses have increased their rates excessively. either because of concern about the continuation of inflation or, more likely, because they can.

If consumers anticipate an increase in the cost of their goods and services, they won't be caught off guard if the cost of their products and services increases.

Labor costs will almost always make up the largest portion of this pie of final costs, and both of them are increasing.

Currently, there is an extremely low rate of unemployment and fewer individuals are opting to work. This increases the bargaining strength and motivation of workers to demand greater wages given the constant mention of inflation.

It probably won't go down well if you walk into your boss's office and ask for a raise, explaining that you will be difficult to replace in this labor market.

It is much more acceptable to say that you need a rise to keep up with inflation. If everyone did this, it would be extremely simple to understand how our final pricing for the products we choose to buy off the shelf would increase.

Can we then solve this? Indeed, increased interest rates will slow down consumer and company activity, which will make enterprises and employees less confident in demanding record profits and pay raises.

How is the economic downturn? It's possible that inflation is like Tinker Bell in that it can only exist if people truly believe it can, but it doesn't make it any less of a problem.

The majority of the measures used by governments and reserve banks throughout the world to combat inflation are the exact reverse of those taken to combat recessions.

When inflation is out of control in an economy, the central bank raises interest rates and cuts spending while increasing taxes.

The central bank reduces interest rates and increases government spending while lowering taxes amid a recession.

What should be done, then, when inflation is high and the economy is still on the verge of a recession? The real solution is a compromise of some sort.

The primary goal of the Federal Reserve Bank is price stability, and while they often work to balance this with encouraging economic growth, if they find themselves in a tight spot, they may decide to keep prices where they are even if it means sending the country into a recession.

Even the most severe recessions may be overcome, but recovering from hyperinflation is far more difficult.  With all of the issues facing the world right now, the Fed would never consider hiking interest rates, but due to inflation, they are now doing so.

However, unlike the Fed, the government doesn't have a specific mission; rather, it exists for the benefit of the people it represents, so, its response will be quite different.

The Federal Reserve's efforts to contain inflation are unaffected by the White House, despite the fact that it recognizes that doing so could hinder the economy's recovery.

The White House has already said that fighting inflation is its top priority in terms of the economy. The administration is instead working to implement fresh stimulus programs to lessen the effects of inflation and the looming recession.

But wait, aren't massive government stimulus programs partially to blame for our inflation issue?  Yes, it is, but these new stimulus measures are different in that they aim to boost the economy's supply of goods and services rather than just the demand for them.

Giving someone a $1,000 doesn't inevitably increase the economy's value.  Sure, they can use it to support businesses, but if you do this frequently enough, inflation will become a problem.

Instead, this new stimulus plan focuses on expanding infrastructure, releasing oil reserves, and increasing housing construction, all of which will increase the economy's supply of goods and services, which should hopefully both taper rising prices and simultaneously provide some level of economic stimulus.

Unfortunately, we are unable to escape either the recession or the inflation.  What remains to be determined is how bad it will be.

Reserve banks have admitted there is an inflation problem, and after waiting a little too long, they are now acting decisively to address it.

Because of the continued strength of the labor market, at least some people continue to earn money. Although the stock market is having a terrible year, this could actually be a good thing.

A low interest rate environment allowed people to gamble on what companies would change the world in the decades to come instead of investing in good old-fashioned businesses that were producing value now.

 The majority of the value lost in the headline indexes has come from tech companies that were arguably wildly overvalued. Most of what has driven the value of the entire stock market down is the decline in the value of these IT companies.

The majority of the world's largest, more established businesses are really having a wonderful year. Given the close relationship between these two asset groups, housing prices are likely to see the similar decrease.

But once more, that isn't always a terrible thing for the economy as a whole.  The largest economic downturns in history, including 1929, 1937, 2001, and of course 2008, more or less came as a complete surprise.

The fact that we have been anticipating this for years makes us less likely to be caught off guard by the effects of either inflation or a severe recession, though this is not a reason to become complacent.