What is the difference between inflation and deflation, and stagflation
Most of us have witnessed prices gradually rise for gas or groceries. Remember when you could purchase 20 gallons of gas for $20 in 1999? Sadly, that same $20 won’t get you nearly as far today.
If you’ve been keeping up with the news or financial stories, you’ve likely heard much about the central banks and Federal Reserve, negative economic growth, skyrocketing energy prices, and our current inflationary environment causing higher prices across many aspects of our lives. In this post, we share why preparing your retirement portfolio for this decline in purchasing power is crucial and discuss two related economic phenomenons: stagflation and deflation.
What is Stagflation?
Stagflation is a word used to describe an economic condition where high inflation, low growth, and high unemployment coexist. It is measured using the Misery Index, which reflects the terrible situation. Dealing with stagflation is challenging for policymakers because fixing one issue can exacerbate another.
Despite being considered unlikely by economists, it has happened repeatedly in developed countries since the 1970s oil crisis. Based on recent predictions, the United States may enter into stagflation soon, and Forbes suggests that policymakers should focus on reducing unemployment and then tackle inflation.
Slower Economic Growth: Stagnation
Economic stagnation is when the economy has halted or slowed to a certain threshold. This can happen for various reasons, including rising interest rates, lack of innovation or technology, political instability, and decreased population growth. However, overcoming a stagnant economy is possible. Identifying root causes and implementing practical solutions can ensure a vibrant, thriving economy for future generations.
Deflation means prices of goods and services are falling, which is the opposite of inflation. It may seem reasonable, but deflation is often a sign of a weak economy with recessions, reduced spending, and unemployment. How can you prepare for it? Invest in high-quality corporate bonds or stocks in safe sectors like health care and utilities, or buy stocks that offer regular dividends.
Cash is also an option. But remember, stagflation and deflation have different economic growth causes and effects. Understanding and preparing for them is crucial to ensure long-term investment stability. And policymakers need to manage these challenges to promote growth.
Embracing economic growth and stability is critical to overcoming increasing inflation, stagnation, and deflation. To generate more productive outcomes, policymakers have proactively put forward promising initiatives:
- Ammedining the Social Security earnings test allows senior staff to claim an Earned Income Tax Credit.
- Adjusting the Saver’s Credit
- Upgrading tax preferences for retirement savings
All in a bid to bolster investments via regulatory developments and federal funding.
The demand must stay within control due to offsetting new investments, so workforce stimulation should be central alongside improving individual financial reserves through wisely chosen saving plans – our most considerable toolkit enhancing prosperity overall!
What Steps Could Help Protect Your Portfolio During an Economic Downturn?
How can investors shield their portfolios from the financial impacts of inflation and stagflation?
To protect against inflation, investors often invest in high-growth stocks, gold, and U.S. Treasury inflation-protected securities (TIPS), which can offer returns that outpace the inflation rate. To learn more about safeguarding your retirement portfolio from inflation, click here.
In times of stagflation, investors may opt for risky assets, such as high-growth stocks or certain commodities, while avoiding corporate and U.S. government bonds, which typically don’t keep pace with inflation.
However, the best financial advice is to seek professional guidance from a fiduciary financial advisor.
By partnering with a fiduciary advisor, you can create a long-term financial plan that can help you maintain your purchasing power which will help you be better positioned for shifting conditions while giving you a knowledgeable partner to rely on when it’s time to make changes.