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What is stagflation and should you be worried?

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The term “stagflation” has been used a lot lately.

Mohamed El-Erian, renowned economist and president of Queens’ College, University of Cambridge, recently made headlines when he said in an interview that stagflation was here even though recession was not yet. arrival. And according to a recent Securities Industry and Financial Markets Association survey, 80% of economists flagged stagflation as a long-term risk to the economy.

If you haven’t already, it’s not too difficult to deduce from the term “stagflation” itself what it means: a stagnant economy combined with inflation. Or as many would say, not a good place to be.

We already know that part of this equation is true. There is no doubt that we are currently experiencing record inflation. The second part about slowing economic growth becomes clearer – the latest data shows the economy officially shrank 1.6% in the first quarter of 2022 – but we have yet to reach the high level of unemployment that characterizes generally a “poor economy,” as Laurence Kotlikoff, an economics professor at Boston University, puts it.

“We are not in stagflation because the unemployment rate in May was very low – only 3.6%,” Kotlikoff told Select.

But that still leaves a lot of people wondering: Should I be worried? How much serious risk is stagflation? Below, Select takes a closer look at what it all means.

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Should we worry about stagflation?

Economists have varying answers on this, but a lot depends on what GDP data we’ll see coming out of the second quarter, Kotlikoff warns. This data will indicate whether we are truly in a recession, which is technically defined as two consecutive quarters of negative GDP growth and is often accompanied by high or rising levels of unemployment.

“Stagflation is recession accompanied by inflation,” says Kotlikoff. “We’re not clearly in recession, so we’re not clearly in [period of] stagflation.”

At the time of Select’s interview with Kotlikoff, however, he mentioned that the Atlanta Federal Reserve forecast only 0.3% growth for the second quarter of this year: I would say that apart from the high unemployment figure, that we are in a [period of] stagflation,” says Kotlikoff.

But as of July 1, the latest data shows the Atlanta Federal Reserve is now estimating growth of -2.1%, down from the 0.3% growth figure cited by Kotlikoff.

We can infer that as long as the expansion of the economy stagnates and inflation remains high, there will be a fear of stagflation. Much also depends on how the unemployment figures develop in the coming months.

How to prepare your finances for stagflation

Whether preparing financially for a recession or stagflation – or simply trying to prepare to be as financially stable as possible – conventional money movements such as building a emergency funds, cutting expenses from your budget, and paying off debt are all applicable here.

Plus, with interest rates rising and expected to rise further, now is the time to pay off any variable interest rate debt, like credit card balances, before it gets even more expensive.

Credit cardholders who have a monthly balance should consider transferring that expensive debt to a balance transfer card. Many of these cards offer a 0% APR introductory period of up to 21 months, which can help you significantly reduce your debt without any additional interest accruing. Select has rated the Citi Simplicity® Card and Citi® Diamond Preferred® Card among the best 0% APR balance transfer cards.

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Also prepare your purchases

There’s also a way to prepare for your big purchases, like buying a house. “Mortgages are great inflation hedges because you can pay back in diluted dollars,” suggests Kotlikoff. “Yes, mortgage rates are high, but after inflation they are actually still negative.

Kotlikoff describes a financially savvy scenario of taking out a long-term mortgage while simultaneously buying and holding long-term inflation-linked treasury bills. “You’ll earn on your mortgage repayment if inflation continues or rises and be protected on your investment in Treasuries with one big caveat — inflation protection is taxed,” says Kotlikoff.

Another way to prepare for your purchases while protecting yourself against inflation is to buy things now that you would otherwise have to buy in the future. “You can buy next year’s paper towels today and store them,” says Kotlikoff. “But what’s true of paper towels is true of all expected future expenses — on cars, additions to your home, clothes, appliances, and similar durable goods. That’s why these inflation hedges prices are rising – even faster than the overall rate of inflation.”

At the end of the line

While waiting to see how the second quarter GDP numbers will officially change, we can already conclude from what we saw in the first quarter and with today’s record inflation that the economy is not as strong anymore. than she once was. Try not to worry and instead be proactive in setting up the best possible financial scenario so that no matter what happens, you are prepared.

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Editorial note: Any opinions, analyses, criticisms or recommendations expressed in this article are those of Select’s editorial staff alone and have not been reviewed, endorsed or otherwise endorsed by any third party.