Stagflation, Inflation and Recession: No, They’re Not the Same

What’s taking place

Inflation is steep and financial development is sluggish. Economists say {that a} recession, and even stagflation, is a excessive danger.

Why it issues

Stagflation — a uncommon mixture of excessive inflation and excessive unemployment — ravaged the US economic system in the Nineteen Seventies and early Eighties.

What it means for you

Soaring costs imply that fuel, meals and requirements are dearer, and a sluggish economic system means it is tougher for Americans to earn cash, safe employment and save.

Could we actually be dealing with an financial meltdown? Here’s what we all know: Inflation isn’t slowing, and wages aren’t maintaining with skyrocketing costs. Over the final 12 months, inflation has surged by 8.6%, the largest annual rise in 4 many years. The Federal Reserve raised the federal funds rate final week with its largest fee hike in 28 years to attempt to sluggish the economic system, however many monetary specialists are involved that the central financial institution’s insurance policies are more likely to push the economic system into recession

And now, stagflation fears are accelerating amongst Wall Street analysts and economists. The COVID-19 pandemic, provide chain disruptions and the world penalties from the war in Ukraine are making a poisonous combine that might steer the economic system into a good bleaker state, with the menace of mass layoffs and rising unemployment. 

Stagflation — a time period that defines rising costs alongside sluggish financial development and excessive unemployment — hasn’t been seen in the US since the Nineteen Seventies. According to Bank of America’s latest fund manager survey, 83% of buyers anticipate a interval of stagflation inside the subsequent 12 months. Likewise, the World Bank warned in its June report that the world economic system might fall right into a recession and face a interval of stifled development, resulting in broader monetary destabilization. 

What precisely is the distinction between inflation, recession and stagflation? Here’s every little thing it is advisable to learn about rising prices and the place the economic system is likely to be headed.

First, what’s inflation?

Simply put, inflation is a sustained improve in client costs. It means a greenback invoice would not get you as a lot because it did earlier than, whether or not you are at the grocery store or a used automotive lot.

Inflation is often brought on by both elevated demand (resembling COVID-wary customers being lastly prepared to depart their houses and spend cash) or provide facet components like will increase in manufacturing prices and provide chain constraints. 

Inflation is a given over the long run, and it requires historical context to imply something. For instance, in 1985, the value of a film ticket was $3.55. Today, watching a movie in the theater will simply value you $13 for the ticket alone, by no means thoughts the popcorn, sweet or soda. A $20 invoice in 1985 would purchase you virtually 4 instances what it buys as we speak.

Typically, we see a 2% inflation rate from 12 months to 12 months. It’s when the fee rises above this share in a brief time period that inflation turns into a priority.

What about stagflation? Is it the identical as a recession?

The slowdown in the US economy throughout the first quarter of 2022 has raised issues of a recession, however stagflation fears are steadily mounting. A recession refers to a interval of extended financial decline and market contraction the place the unemployment fee goes up and manufacturing goes down, usually slowing inflation. Stagflation, on the different hand, refers to a interval the place a recession is uniquely coupled with excessive inflation. 

A mash-up of “stagnation” and “inflation,” the time period stagflation was coined in 1965, when British politician Iain Macleod lamented the nation’s rising hole between productiveness and earnings: “We now have the worst of each worlds — not simply inflation on the one facet or stagnation on the different, however each of them collectively. We have a type of ‘stagflation’ scenario and historical past in trendy phrases is certainly being made.”

Stagflation turned extra extensively recognized throughout what was referred to as the Great Inflation in the US in the Nineteen Seventies. As unemployment hit 9% in 1975, inflation saved ratcheting upward, reaching more than 14% by 1980. Memories of this dismal financial interval have factored into present fears about out-of-control inflation. 

Economic circumstances as we speak have some parallels to the Nineteen Seventies, but additionally main variations. During the vitality crises then and as we speak, a disruption in the supply chain helped fuel inflation, adopted by a interval of comparatively low rates of interest, in an try to increase the provide of cash in the economic system. Unlike the Nineteen Seventies, although, each the greenback and the stability sheets of main monetary establishments are sturdy. The US unemployment fee additionally nonetheless stays low, at present sitting at 3.6%, based on the Bureau of Labor Statistics.

When do we all know we’re in a interval of inflation?

Inflation is not a bodily phenomenon we are able to observe. It’s an concept that’s backed by a consensus of specialists who depend on market indexes and analysis. 

One of the most carefully watched gauges of US inflation is the Consumer Price Index, which is produced by the federal Bureau of Labor Statistics and primarily based on the diaries of city consumers. The CPI studies monitor knowledge on 80,000 merchandise, together with meals, training, vitality, medical care and gas.

The BLS additionally places collectively a Producer Price Index, which tracks inflation extra from the perspective of the producers of client items. The PPI measures adjustments in vendor costs reported by industries like manufacturing, agriculture, development, pure fuel and electrical energy.

And there’s additionally the Personal Consumption Expenditures worth index, ready by the Bureau of Economic Analysis, which tends to be a broader measure, as a result of it consists of all items and providers consumed, whether or not they’re purchased by customers, employers or federal packages on customers’ behalf. 

The present inflationary interval usually began when the Labor Department introduced that the CPI elevated by 5% in May 2021, following a rise of 5% in April of the identical 12 months — an increase that prompted a stir among market watchers

Though an increase in the CPI in and of itself does not imply we’re essentially in a cycle of inflation, a persistent rise is a troubling signal. 

How did we get such excessive inflation in the first place? 

Today’s inflation was initially categorized as “transitory” — regarded as momentary whereas economies bounced again from COVID-19. US Treasury Secretary Janet Yellen and economists pointed to an unbalanced supply-and-demand scale as the trigger for transitory inflation, provoked when supply-chain disruptions converged with excessive client demand. All of this had the impact of accelerating costs.

But as months progressed, inflation began seeping into parts of the economic system initially undisturbed by the pandemic, and manufacturing bottlenecks persevered. The US was then hammered by shocks to the economic system, together with subsequent COVID variants, lockdowns in China and Russia’s invasion of Ukraine, all resulting in a choked provide chain and hovering vitality and meals costs.

“I feel I used to be flawed about the path that inflation would take,” Yellen told CNN in late May. “There have been unanticipated and massive shocks to the economic system which have boosted vitality and meals costs and provide bottlenecks which have affected our economic system badly that I did not — at the time — did not totally perceive, however we acknowledge that now.”

Although gasoline prices have been an enormous contributor to the rise of inflation in 2022, April’s CPI studying confirmed a shift. Gas costs had been down 6.1%, whereas will increase in prices for rent, airline tickets and new vehicles contributed most to inflation in April. However, fuel costs are again up once more for May, rising by 4.1% from April’s dip.

How can the Federal Reserve attempt to ease inflation?

The Fed, created in 1913, is the management heart for the US banking system and handles the nation’s financial coverage. It’s made up of 12 regional Federal Reserve banks and 24 branches and run by a board of governors, all of whom are voting members of the Federal Open Market Committee, which is the Fed’s financial policymaking physique.

While the BLS studies on inflation, the Fed moderates inflation and employment charges by managing the provide of cash and setting rates of interest. Part of its mission is to maintain common inflation at a gentle 2% fee. It’s a fragile balancing act, and the fundamental lever it might probably pull is to regulate rates of interest. In basic, when rates of interest are low, the economic system and inflation develop. And when rates of interest are excessive, the economic system and inflation sluggish. 

The federal funds fee is the rate of interest banks cost one another for borrowing and lending. When the Fed raises this fee, banks cross on this fee hike to customers, driving up the total value of borrowing in the US. Consequently, this usually drives customers, buyers and companies to pause their investments, rebalancing the supply-and-demand scales disrupted by the pandemic.

Raising interest rates makes it dearer for companies and customers to take out loans, that means shopping for a automotive or a house will get dearer. Moreover, securities and cryptocurrency markets may be negatively affected by this: As rates of interest improve, liquidity in each markets goes down, inflicting the markets to dip.

Consequently, this usually drives customers, buyers and companies to pause their investments, rebalancing the supply-and-demand scales disrupted by the pandemic.

With charges nicely over the 2% inflation purpose, the Fed reacted by raising rates a quarter point in March, a half point in May and three-quarter factors in June. The Fed has famous that we’re more likely to see extra fee hikes this 12 months — as many as six in whole. In June, Fed Chairman Jerome Powell indicated that one other 0.5 or 0.75 share level improve is probably going at the Fed’s subsequent assembly in July. 

What about deflation, hyperinflation, shrinkflation?

There are a number of different “flations” price figuring out about. Let’s brush up.


As the identify infers, deflation is the reverse of inflation. Economic deflation is when the value of residing goes down. (We noticed this, for instance, throughout elements of 2020.) Widespread deflation can have a devastating influence on an economic system. Throughout US historical past, deflation tends to accompany financial crises. Deflation can portend an oncoming recession as customers are inclined to halt shopping for in hopes that costs will proceed to fall, thus making a drop in demand. Eventually, this results in customers spending even much less, decrease wages and greater unemployment charges. 


This financial cycle is just like inflation in that it entails a rise in the value of residing. However, not like inflation, hyperinflation takes place quickly and is uncontrolled. Many economists outline hyperinflation as the improve in costs by 1,000% per 12 months. Hyperinflation is unusual in developed international locations like the US. But bear in mind Venezuela’s financial collapse in 2018? That was due partly to the nation’s inflation fee hitting more than 1,000,000%.


Tangentially associated to inflation, shrinkflation refers to the apply of firms lowering the measurement of their merchandise whereas retaining the identical costs. The impact is an identical to inflation — your greenback has much less spending energy — and turns into a double whammy when your greenback is already weaker. Granola bars, drink bottles and rolls of bathroom paper have all been caught shrinking in current months.

Michelle Meyers and Justin Jaffe contributed to this report.

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