inflation, stagflation, and what it all means to you

Breaking down the supply-demand issues that cause sticker shock

Table of Contents

• Inflation defined
• Stagflation defined
• 2 tips to manage your money

Your dollar has less purchasing power today than it did a year ago.

Every day, millions of Americans experience an economy where a variety of circumstances, from stepped-up demand to a shortage of raw materials, cause product prices to rise faster than usual. For the average consumer, price hikes due to inflation affect a range of spending decisions, from whether to replace the old refrigerator to limiting retirement investments.

Understanding the causes of inflation will prepare you to make informed decisions to weather it more comfortably and allow you to recognize the signs of other economic events, such as stagflation.

Best part: understanding inflation (and stagflation) doesn’t require a macroeconomics class. It just takes a little thinking about the story behind the goods in your shopping basket.

Inflation defined

Inflation occurs when the prices of day-to-day goods go up and our money’s purchasing value goes down. One dollar buys fewer eggs, and one grocery trip for the same products costs more than a year ago.

Typically, prices grow slowly, by about 2% each year. This is “built-in inflation,” and is rooted in the expectation that prices will “inch up” to support a rising standard of living.¹

There are two key forms of short-term inflation:

• Demand-pull inflation. This occurs when the consumer’s desire to buy things exceeds what companies can supply.²
• Cost-push inflation. These hikes result from products costing more to make and/or provide.³

Sometimes, inflation may occur at the same time as other challenging economic events. Those of us who lived in the 1970s, for example, might recall what happens when inflation is combined with other economic challenges. Meet stagflation.

Stagflation defined

Stagflation is basically a case of continual inflation immersed in a slowed economy and high unemployment, resulting in a stagnation of financial growth.⁴

When stagflation occurs, most people earn less money but are charged more for almost all of the goods they buy. This combo triggers a spiral: Consumers spend less, corporate sales suffer, jobs are cut, and the spiral continues.

But, if the last period of stagflation occurred in the 1970s, why bring it up now? Here’s why: The unprecedented events of a global pandemic have unleashed a series of unforeseen conditions, such as an increased demand for home-improvement materials and a simultaneous disruption to supply. Add in rising energy prices, and economists are paying close attention.

However, not all are overly worried. Here’s what you can do.

2 tips to manage your money

Yes, inflation, stagflation, and all of the contributing factors in between can affect your budget. But the following investment and savings strategies should help position you to better manage the sticker shock of eggs, fuel, and other goods until the economy smooths out.

1. Keep your investment portfolio mixed and inflation-safe. Inflation alters the prices of goods, but not assets or investments such as real estate, stocks, or bonds. Ensure your portfolio is diverse and includes some recession-resistant holdings (such as real estate). An investment advisor can offer suggestions.
2. Sock away discretionary purchase money. You should save any extra money you have in a checking or savings account. This will help prevent you from spending it if you don’t have to. If the Federal Reserve cautiously raises interest rates, the banks that offer the top rates may do the same for their interest-bearing savings accounts, such as certificates of deposits and money market accounts.⁵

And know this: economic conditions will get better. While the prices of the goods in your basket are beyond your control, you do have the power to determine your spending and savings choices.

Want to learn more about the easy, accessible ways you can put your money to work for you (and even your kids)? Visit our personal savings page to explore options, open an account, or chat with us live.