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What is Stagflation, and What Can My Business Do About It?

July 6, 2022

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Perhaps you’ve seen the word “stagflation” floating around the bottom of your TV screen and wondered what, exactly, it is. Blowing up a bunch of deer inflatables for your next summer pool bash? Well, not quite — and since it’s a term we haven’t heard since roller disco was a thing, it’s a concept that’s new to many.

So what is stagflation? And what does it mean for your small business? Ana Corrales, an economics professor at Miami-Dade College, throws us back to the ‘70s and explains the whole concept.

What is stagflation?

Stagflation is a delightful portmanteau of “stagnant” and “inflation,” where the economy falls into recession, while prices increase. The last time the economy saw stagflation was the late 1970s and early ‘80s, when the Bee Gees topped the charts, inflation reached over 14%, and the U.S. GDP declined. While we’re not quite there yet, some experts have serious concerns.

A woman looking disgruntled before saying, "I don't like the sound of that."

Why? Well, it starts with the Consumer Price Index (or CPI), a figure economists use to measure the cost of a “basket of goods.” As the price of those goods go up, our economy enters inflation. The most recent report showed an increase of 8.6% year-over-year — rates we haven’t seen since MTV played actual music videos.

“Most of our adult lives, we’ve been at 2% or less, so for us this is crazy,” says Corrales. “We’re not used to these kinds of inflationary pressures, it’s been a lifetime since we’ve experienced that.”

That’s the “flation” part. The “stag” part isn’t quite as obvious, as Corrales explains. Economists have been hesitant to say America is in the midst of a full-fledged recession.

“What people have to understand is that recession is a backwards-looking thing,” she says. “Economists look back at the last three months and see if we’re producing more than we were the previous quarter. If they feel we’re in a recession, they’re slow to identify it. It takes at least six months of falling output to be a recession.”

As of right now, production hasn’t fallen enough to say the economy is in a recession, though many are predicting it. Should a recession hit, go ahead and bust out your bell bottoms because the stagflation-tastic ‘70s are back!

What causes stagflation?

Like any economic trend, it’s impossible to pinpoint exactly what causes stagflation. But Corrales says it always starts with a shock.

In the ‘70s, that shock was OPEC drastically cutting oil production, causing Americans to wait on alternating-day gas lines to fill their tanks. This caused demand to outpace supply, and when fuel prices go up, it trickles down to everything.

This time around, the shock was the COVID-19 pandemic, which led to supply chain shortages that still haven’t returned to normal. That short supply drove up demand, which coupled with rising fuel prices and a tight labor market to create the perfect conditions for decades-high inflation.

A man saying, "Even for the Internet it's pretty shocking."

“Some say the Fed kept interest rates too low,” Corrales adds. “It was too easy to borrow money, so businesses expanded and consumers borrowed too much, and it led to inflationary pressures.”

But firms aren’t able to produce at the levels needed to maintain that expansion, because they can’t find people to work. So fears are that the economy can’t keep up with 3.5% unemployment, and we’ll head into a recession.

What’s being done to stop stagflation?

Anyone who’s relied on the government to fill a pothole knows fixing things isn’t exactly their forte. As Corrales explains, solving stagflation would probably take a combination of drastic government spending cuts and raising taxes, a combination no politician on either side of the aisle wants to talk about.

Monetary policy, she said, is a safer bet for now, as the Fed recently raised interest rates to discourage borrowing. While this may curb demand, it might lead to problems should the economy falter. That’s why stagflation is particularly challenging.

A boy dropping his backpack before slowly falling to the floor and lying down.

“The problem is if we go into a stagnant economy, how do we come back from lowering output?” she asks rhetorically. “We can only tackle one problem at a time, so we’re focusing on prices getting out of hand. We can worry later about pulling out of a recession by demanding more goods and services.”

On a micro level, Corrales says small businesses can look at a period of stagflation much like they did the pandemic — as a chance to innovate.

“What are some innovations a firm can do to offset increased costs?” she asks. “You can shift from buying new things to fixing things before buying a replacement. Look to expand buying in the second hand market, too — buy used computers, printers instead of buying a new one.”

She also suggests looking into longer-term contracts with suppliers to lock in prices and ease concern over fluctuations. Businesses can also shift to local suppliers whose prices and cost of transportation are lower, and examine expenses — like power, water, and health care — that can be reduced.

“It would be easy to just pass costs on to customers,” she said. “But they feel (the pinch) too, so they may just say, ‘I’m not going to buy’ if prices get too high.”

Stagflation isn’t here — at least not yet. Still, understanding its causes and having a plan in place are wise strategies for helping your SMB ride out the storm. Seventies nostalgia is fun and all, but the sooner we can stave off stagflation, the sooner we can be reunited with the good times.

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Article

What is Stagflation, and What Can My Business Do About It?

July 6, 2022

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Oops! Something went wrong while submitting the form.

Perhaps you’ve seen the word “stagflation” floating around the bottom of your TV screen and wondered what, exactly, it is. Blowing up a bunch of deer inflatables for your next summer pool bash? Well, not quite — and since it’s a term we haven’t heard since roller disco was a thing, it’s a concept that’s new to many.

So what is stagflation? And what does it mean for your small business? Ana Corrales, an economics professor at Miami-Dade College, throws us back to the ‘70s and explains the whole concept.

What is stagflation?

Stagflation is a delightful portmanteau of “stagnant” and “inflation,” where the economy falls into recession, while prices increase. The last time the economy saw stagflation was the late 1970s and early ‘80s, when the Bee Gees topped the charts, inflation reached over 14%, and the U.S. GDP declined. While we’re not quite there yet, some experts have serious concerns.

A woman looking disgruntled before saying, "I don't like the sound of that."

Why? Well, it starts with the Consumer Price Index (or CPI), a figure economists use to measure the cost of a “basket of goods.” As the price of those goods go up, our economy enters inflation. The most recent report showed an increase of 8.6% year-over-year — rates we haven’t seen since MTV played actual music videos.

“Most of our adult lives, we’ve been at 2% or less, so for us this is crazy,” says Corrales. “We’re not used to these kinds of inflationary pressures, it’s been a lifetime since we’ve experienced that.”

That’s the “flation” part. The “stag” part isn’t quite as obvious, as Corrales explains. Economists have been hesitant to say America is in the midst of a full-fledged recession.

“What people have to understand is that recession is a backwards-looking thing,” she says. “Economists look back at the last three months and see if we’re producing more than we were the previous quarter. If they feel we’re in a recession, they’re slow to identify it. It takes at least six months of falling output to be a recession.”

As of right now, production hasn’t fallen enough to say the economy is in a recession, though many are predicting it. Should a recession hit, go ahead and bust out your bell bottoms because the stagflation-tastic ‘70s are back!

What causes stagflation?

Like any economic trend, it’s impossible to pinpoint exactly what causes stagflation. But Corrales says it always starts with a shock.

In the ‘70s, that shock was OPEC drastically cutting oil production, causing Americans to wait on alternating-day gas lines to fill their tanks. This caused demand to outpace supply, and when fuel prices go up, it trickles down to everything.

This time around, the shock was the COVID-19 pandemic, which led to supply chain shortages that still haven’t returned to normal. That short supply drove up demand, which coupled with rising fuel prices and a tight labor market to create the perfect conditions for decades-high inflation.

A man saying, "Even for the Internet it's pretty shocking."

“Some say the Fed kept interest rates too low,” Corrales adds. “It was too easy to borrow money, so businesses expanded and consumers borrowed too much, and it led to inflationary pressures.”

But firms aren’t able to produce at the levels needed to maintain that expansion, because they can’t find people to work. So fears are that the economy can’t keep up with 3.5% unemployment, and we’ll head into a recession.

What’s being done to stop stagflation?

Anyone who’s relied on the government to fill a pothole knows fixing things isn’t exactly their forte. As Corrales explains, solving stagflation would probably take a combination of drastic government spending cuts and raising taxes, a combination no politician on either side of the aisle wants to talk about.

Monetary policy, she said, is a safer bet for now, as the Fed recently raised interest rates to discourage borrowing. While this may curb demand, it might lead to problems should the economy falter. That’s why stagflation is particularly challenging.

A boy dropping his backpack before slowly falling to the floor and lying down.

“The problem is if we go into a stagnant economy, how do we come back from lowering output?” she asks rhetorically. “We can only tackle one problem at a time, so we’re focusing on prices getting out of hand. We can worry later about pulling out of a recession by demanding more goods and services.”

On a micro level, Corrales says small businesses can look at a period of stagflation much like they did the pandemic — as a chance to innovate.

“What are some innovations a firm can do to offset increased costs?” she asks. “You can shift from buying new things to fixing things before buying a replacement. Look to expand buying in the second hand market, too — buy used computers, printers instead of buying a new one.”

She also suggests looking into longer-term contracts with suppliers to lock in prices and ease concern over fluctuations. Businesses can also shift to local suppliers whose prices and cost of transportation are lower, and examine expenses — like power, water, and health care — that can be reduced.

“It would be easy to just pass costs on to customers,” she said. “But they feel (the pinch) too, so they may just say, ‘I’m not going to buy’ if prices get too high.”

Stagflation isn’t here — at least not yet. Still, understanding its causes and having a plan in place are wise strategies for helping your SMB ride out the storm. Seventies nostalgia is fun and all, but the sooner we can stave off stagflation, the sooner we can be reunited with the good times.

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What is Stagflation, and What Can My Business Do About It?

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