If you’ve ever taken an intro to a Macroeconomics course, the topic of inflation is at the center of many concepts and serves as a basis for more complex economic tools. When understanding the drivers of inflation, there are two major ones: Cost-Push inflation and Demand-Pull inflation. Demand-Pull inflation is more common, and it is when inflation arises when aggregate demand increases at a faster rate than aggregate supply. On the other hand, Cost-Push inflation is a result of an increase in the price of inputs due to the shortage of cost of production, leading to a decrease in the supply of outputs. Cost-Push inflation is the cause of the infamous “stagflation,” which occurs when the market doesn’t naturally correct itself, employment and demand fall while inflation rises. The last time the U.S saw stagflation was in the 1970’s, during the embargo which caused the price of crude oil to skyrocket.
Currently, inflation is running rampant, and some believe stagflation could become a possibility. Indeed, as prices rise at the fastest pace in four decades the Federal Reserve ramps up plans to aggressively hike interest rates. At the root of potential stagflation is the aftermath of the coronavirus pandemic and Russia’s invasion of Ukraine, both of which have majorly disrupted supply chains and caused supply shocks.
What do you think about stagflation and is it something that will happen?
I am not a financial advisor and my comments should never be taken as financial advice. Investments come with risk, so always do your research and analysis beforehand.