Stagflation

Some in traditional and social media are saying that the U.S. economy is experiencing stagflation. It makes me wonder if they know what the word means or are just being sensational to gain attention. The term stagflation describes an economic condition where slow economic growth, high unemployment, and rising inflation occur simultaneously. This is an unusual condition for the economy, as rising inflation and economic stagnation are typically seen as opposite phenomena, with rising inflation often occurring in a growing economy. Stagflation is challenging for central banks because traditional tools to combat inflation, such as raising interest rates or otherwise tightening monetary policy, can increase unemployment and further slow the economy. Similarly, measures to boost economic activity can lead to even higher inflation. Many developed economies experienced severe stagflation in the 1970s, largely driven by oil price shocks. The conditions leading to the stagflation of the 1970s are not present today. Although inflation is higher than it has been in recent years, unemployment is low, and the economy, as measured by GDP (Gross Domestic Product), is growing. This is not to say that economic conditions cannot develop into stagflation; we're just not there yet.

The Bureau of Labor Statistics releases the Misery Index, a metric calculated by adding the US inflation rate and the US unemployment rate. During a period of stagflation, we would expect the Misery Index to be elevated, as it was during the last period of stagflation in the '70s and early '80s.