What is Stagflation?

You may have heard the word “stagflation” bandied about. This is high inflation happening at the same time as economic stagnation. Why is it happening? Rising global demand is driving energy prices up. The global cost of food is also shooting up. If wages increase to compensate, this could push inflation further.

At the same time, the collapse of the sub-prime mortgage market in the US has led to a shortage of available credit, which is stifling the financial sector everywhere. High interest rates and stricter lending for mortgages have hit the construction industry. Falling house prices and the threat of redundancy have dented consumer confidence.

If economic difficulties in the US and other countries cause them to buy less from Asia, the slowdown will worsen, leading to higher unemployment here.

Stagflation presents a dilemma: if the government lowers interest rates to help the economy, consumers may be tempted to borrow more, spend more and drive prices higher. If it raises interest rates to try to control inflation, it could slow the economy into recession.

Can you protect yourself? Interest rates are likely to rise, so it might be wise to do what you can to reduce debt. At the same time, savers can take advantage of rising interest rates – and it may be a good time to have savings in case of emergencies.
On the plus side, if you hold on to your job and your earnings rise with inflation, your mortgage will shrink in real terms.