What is stagflation? Meaning of the term explained and what it would mean for the UK economy – Uber Turco News

Stagflation is a combination of the words stagnation and inflation; it was a term first coined in the 70s although the economist John Maynard Keynes was said to have discovered it.

For an economy to be experiencing stagflation, inflation must be rising, while economic growth, or gross domestic product (GDP) is falling. This means people’s wages do not go so far and unemployment is likely to rise.

The UK does appear to be experiencing stagflation, GDP is falling while inflation is predicted to rise to around 10 per cent by the end of the year.

Stagflation and recession do go together, but for an economy to be in a recession it has to have recorded two successive quarters, ie six months, of negative growth, while stagflation can happen at any time and does not have a time limit.

As with recessions, stagflation is caused by an economic, or geo-political shock; stagflation in the 70s was the result of an oil price shock.

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One of the reasons why the UK may also be experiencing stagflation is because there is a lack of skilled workers needed to fuel growth.

After two years of supply issues as a result of the pandemic, economies around the world are needing to employ more workers to make up for pent-up demand.

Supply issues haven’t helped, as they have also driven up prices. Energy prices were already rising before the pandemic but now they are likely to rise even more, as a result of Russia’s invasion of Ukraine.

A good example of economy that has experienced stagflation is Japan where for at least decade – the 90s, economic growth slowed and inflation rose. This was the result of exceptional circumstances, the Japanese economy was effectively one big bubble – having done well, due to excessive lending.

While this fuelled the economy, it only took a small shock for things to become unsustainable.

Lewis Shaw founder of Shaw Financial Services said one way of measuring stagflation is was to use what economists call the misery index, where you add the inflation rate to the unemployment rate.

He said: “Generally, you’ll see patterns over the last 100 years that predict it and the outcomes that flow from it when you do that. It’s usually caused by increases in raw materials, particularly oil, which means things cost more to produce and transport around, leading to higher prices in the shops.”

“Add on top supply chain issues and supply shocks because of Brexit and Covid, and you have a heady mix of all the wrong stuff. These factors combined together have caused the inflation we are currently experiencing.”

There are two types of inflation, demand-pull (good) and cost-push (bad). Cost-push inflation occurs when overall prices increase due to increases in raw materials and a higher cost of production (energy). This has a double whammy on the ordinary person in the street because inflation eats away your purchasing power at the same time as prices are rising.

The reduction in consumer spending has a knock-on effect of less money in the economy overall, which reduces “aggregate demand” in economics language, eventually translating into job losses.

“The problem is that governments and central banks can only solve one of two problems at a time; control inflation by raising rates or support employment by cutting rates. So policymakers have to pick the least worst direction of travel.

“In this instance, they’ve chosen -wrongly, in my opinion- to try and get inflation under control by raising rates, leading to increased unemployment in the future. This culminates in a recession as the negative economic feedback loop begins. Fewer jobs equals less money being spent overall equals fewer jobs which equals less money being spent overall.”

What can be done about stagflation?

Shaw believed overcome supply chain bottlenecks, increasing productivity and find cheaper alternative energy sources could help solve the problem.

“But we can’t, as we’ve just caused more supply chain issues with Brexit by making us a third country to the largest trading bloc in the world. Increasing productivity is very hard to do. Finding cheaper energy sources such as solar, wind, green gas, and hydroelectricity requires the government to commit to a green new deal that they won’t. This leaves the UK economy in a very perilous situation.”

How does stagflation affect me?

The main concern around stagflation is the inflation part and the UK’s rate of inflation has been rising the past few years, having been at historic lows for more than 20 years.

There are concerns that by the end of 2022 inflation could hit 10 per cent, having been around 2 per cent for the past 10 years.

It is worth remembering that inflation has been historically much higher. In the early 90s it was nearly 10 per cent.

Some inflation is good, because it means the economy is growing, too much can cause problems; this is why UK Government has set an inflation target of 2 per cent. If the rate goes above 2 per cent the Governor of the Bank of England has to send the UK’s Chancellor of the Exchequer an open letter explaining why inflation has moved away from target and what action the Bank is taking to bring inflation back to target.

If you are a saver

With interest rates going up then it is worth keeping an eye on the interest rate your savings accounts are paying. If possible you need to make sure you are getting the same interest rate as the rate of inflation.

Use your tax-free savings allowance, too and you will not pay tax on the interest earned on a cash-only Individual Savings Account. So if the rate is low, you can still maximise the amount of money you save.

If you are an investor

If you are able to invest then make sure your portfolio is able to mitigate and perhaps benefit for a rise in inflation; some investors look to invest in gold or other precious metals.

If you are a borrower

Now is the time to pay off debts while rates are low and make sure you transfer them to a 0 per cent balance transfer card. It may be worth looking at fixing your mortgage rate, you can compare mortgage rates and work out what the best deal is for you

If you have a state pension?

Inflation figures are used to work out how much the UK state pension needs to be increased by each year. The Government normally uses September’s CPI to set the following year’s pension increase. This means state pensions will be increased in line with a CPI of 3.1 per cent during 2022. The basic state pension will increase to £141.85 per week and the full rate of new state pension will increase to £185.15.

Around 10 million state pensioners will see their pension go up by £288.60 during the year.

The state pension payment is protected by a so-called “double lock”. This means it will increase by the higher of either September’s rate of inflation or the government’s guaranteed minimum of 2.5 per cent.

In previous years the state pension is normally increased by the so-called “triple lock”, which also links the state pension to average earnings.

But this has been suspended for a year due to the pandemic.

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