Glossary - Stagflation
Stagflation is an economic condition combining stagnant economic growth, high unemployment, and high inflation. It represents a challenging scenario where the usual policy tools to combat inflation (tightening the money supply) can exacerbate unemployment, while those used to reduce unemployment (increasing money supply) can worsen inflation.
Also known as
- Inflationary recession
Use cases examples
- Economic Policy Reviews: The period of the 1970s in many advanced economies could be characterized by stagflation, wherein policymakers struggled to balance policies addressing simultaneously high inflation rates and rising unemployment.
- Investment Strategy Reports: During stagflation, traditional investment paradigms are challenged, as both equity and bond markets can perform poorly due to sluggish economic growth and rising inflation rates.
Considerations for investors
- Investors should be wary of the impact of stagflation on portfolio companies, especially those reliant on discretionary consumer spending or with high operational leverage.
- Diversification across asset classes and geographical regions becomes crucial, as stagflation may not impact all industries or regions equally.
Considerations for founders
- Founders should prepare for increased costs of borrowing and potentially slower growth in consumer demand during periods of stagflation.
- Cost management becomes even more critical in a stagflation environment, as revenues may grow more slowly while costs, especially for raw materials, may increase.
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