Stagflation: what it is, what can we do about it

hyperinflation, stagflation
Josef Stredula, the head of the trade unions, expressed his concern, warning of stagflation in connection with the Czech National Bank’s policy and government cuts. He is not the only one. The term from economics textbooks has recently reappeared in the Czech and foreign public space.

What is stagflation?

Stagflation refers to an economy that is experiencing a simultaneous increase in inflation and stagnation of economic output. Stagflation was first recognized during the 1970s when many developed economies experienced rapid inflation and high unemployment as a result of an oil shock. Since the 1970s, rising price levels during periods of slow or negative economic growth have become somewhat of the norm rather than an exceptional situation.

Is there a risk of stagflation in the Czech Republic and Slovakia?

Marketa Sichtarova, head of Next Finance, stated about the economic development in the Czech Republic: the risk of so-called stagflation is growing rapidly in countries such as the Czech Republic and Slovakia. Based on the developments of the last few days and hours, we can already say this with a high degree of certainty.

Why is stagflation such a scarecrow?

Stagflation is a state of combination of inflation and economic stagnation or even a possible economic downturn, which is very much feared by economists. It is feared simply because there is no simple cure for it. Indeed, economic policy has more or less effective tools to promote economic growth while at the same time increasing inflation as a side (and unwanted) effect. Or it knows the tools to tame inflation while reducing economic growth as a side (and unwanted) effect. But it is not equipped to simultaneously tame inflation and increase economic growth. But that is exactly where we are heading now.

Does the situation in Ukraine have an impact?

The situation in Ukraine is increasingly creating inflationary pressures: gas, oil, energy will become more expensive. The shortage of ore will make metallurgical products more expensive. The shortage of components will make cars more expensive. And so on and on. But alongside this, a new wave of foreign trade paralysis is weakening the productive capacity of enterprises. So again, less will be produced. So the economy will grow more slowly than expected. And the dreaded combination is here.

Why are prices now rising even faster?

The war is hitting commodity markets particularly hard. The price of natural gas in Europe is already exceeding historic records. The price of Brent crude oil, although still quite far from the highs, is hovering around USD 120 per barrel, which is an enormous amount. The price of gold is not yet at an all-time high, but is steadily moving towards it. The iron ore price is not to be shamed. But beware, for our people the situation is even spicier in that the crown is weakening significantly. It is not a question of the crown per se, rather it is a question of other currencies that are considered safe havens strengthening. Such as the dollar. So capital is flowing away from the CZK and towards these safe havens.

What can we do about it now?

It is reasonable to try avoiding getting into debt, not only mortgages but also consumer credit. There is no point in buying what I cannot afford and hoping for better times. It is even better to take care of your health, invest in education and not be afraid of retraining. And as for investments, diversify and invest in other assets rather than bonds or shares – land and precious metals never go bankrupt. There is also the possibility to allocate a certain amount in digital currencies, which are not dependent upon state or institutions, such as banks.

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