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Move over, inflation — stagflation is the latest economic concern plaguing Americans.
The term stagflation refers to a triple threat of not-so-great economic indicators: rising prices, sluggish economic growth, and high unemployment. And recently, experts have worried that the U.S. economy is exhibiting signs of potential stagflation, especially in light of the Trump administration’s moves surrounding tariffs and federal job cuts.
So, what happens during stagflation? And how does it impact your wallet? Let’s take a closer look.
What is stagflation?
Stagflation is a combination of two words — stagnation and inflation — that describes an economic scenario where three things happen at the same time:
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Stagnant economic growth (or a recession)
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High inflation (rising prices)
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High unemployment
This isn’t a new phenomenon. For example, the U.S. experienced a period of stagflation in the 1970s when the Organization of the Petroleum Exporting Countries (OPEC) drastically increased oil prices, causing inflation to soar and the economy to stall, leading to high unemployment.
So, what makes stagflation different from inflation? Both scenarios are marked by rising prices — the difference is that stagflation is accompanied by a shrinking economy and job loss.
What causes stagflation?
Several factors can lead to stagflation, and usually, it’s a combination of things. Here are some situations that are thought to contribute to stagflation:
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Disruption to supply chains: When there’s a shortage of crucial goods or commodities, it can lead to higher prices for consumers and a slowdown in economic growth.
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Slowdown in consumer spending: When prices are higher, consumers are less likely to spend money. If businesses are losing revenue due to lower spending, they may implement hiring freezes and even layoffs.
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Wage-price spirals: When prices are rising, workers might demand higher wages. This can lead companies to pass those increased labor costs onto consumers through price hikes, perpetuating the cycle of inflation.
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Fiscal policies: Certain government policy decisions on taxes, spending, or regulation can backfire, contributing to inflation and slowed growth.
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The Fed’s monetary policy: The Federal Reserve is tasked with maintaining the stability of our financial system. However, if the Fed’s monetary policies overstimulate the economy, or it fails to react to changing conditions appropriately, stagflation can occur.
Basically, major shocks to the supply chain or fiscal policies that raise costs for consumers and businesses have the potential to usher in an era of stagflation. While each of these factors may not lead to stagflation on their own, the combination of several of these scenarios can.
How stagflation can impact you
Stagflation might seem like a broad, somewhat mysterious economic term, but it has a direct impact on your wallet. Understanding how stagflation occurs and what it means for your finances can help you mitigate its effects.
Higher prices
One of the most noticeable effects of stagflation is higher prices for goods and services. Your paycheck may not go as far at the grocery store or gas pump, causing you to spend more for everyday expenses and even take on debt to keep up with higher costs.
Job instability
As businesses cut costs and downsize to improve their bottom lines, you might face fewer job opportunities, lower wages, or layoffs. If you struggle to find a new job for some time, it could have long-term repercussions for your career growth.
Difficulty saving money
The combination of higher prices and job instability can make it tough to save for the future. That’s especially true if you accumulate high-interest debts, such as credit cards, to get by.
Read more: 7 ways to save money on a tight budget
How to protect yourself from stagflation
While it’s still debatable whether or not the U.S. is actually in a period of stagflation, there’s no telling what the future holds. It’s always a good idea to be proactive and take steps to protect your finances against the negative consequences of stagflation.
This includes paying down your outstanding debt (especially high-interest debt), building up your emergency savings (and parking that money in a high-yield savings account), and exploring new streams of income to better position yourself for whatever may lie ahead.
Read more: How to recession-proof your savings
