Stagflation, Recession, Unemployment: Predictions From Apollo’s Top Economist

A sustained upward trend in these indices indicates rising inflation. This puts central banks like the Federal Reserve in a no-win situation. Inflation spiked to 7% in 2021 during the pandemic, but has cooled significantly since then. That’s certainly better than 7%, but ideally, the Federal Reserve would prefer it to be lower. Lower inflation means goods remain affordable, which makes it easier for consumers to weather economic downturns. You’re probably familiar with inflation, but how much do you know about stagflation?

It was marked by a pre-existing inflationary trend, exacerbated by sudden and substantial oil price hikes triggered by OPEC oil embargoes. Historically, economists, influenced by the Great Depression and Keynesian principles, believed policies curbing inflation raised unemployment, and vice versa. However, the occurrence of this extreme inflation in the latter half of the 20th century challenged this perspective.

Inflation vs Stagflation

Oil is essential for many industries, including transportation, manufacturing, and more. When oil prices rise, businesses face higher operating costs, which often leads to increased prices for goods and services. Oil prices eventually came back down to earth, and, since energy costs are a big part of inflation, this naturally lowered consumer prices. The Federal Reserve ended up having to raise interest rates to more than 19% at one point to slow the economy down and control inflation. “After surging in 2020 on government income support for the COVID shock, the U.S. broad money supply is falling for the first time since the late 1940s,” Wieting says. “Headline consumer price increases have already slowed sharply, but it takes two full years for monetary policy actions to be fully felt in consumer prices.”

At the same time, because the tariffs impact prices, we could see changes in prices—higher inflation. Stagflation occurs when high inflation coexists with stagnant economic growth and high unemployment. In contrast, a recession is characterised by a significant decline in economic activity, output, and employment. For instance, if monetary policy is too loose for an extended period, it may lead to excessive money supply growth. This can fuel inflation while potentially creating economic imbalances that hinder growth.

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In other words, stagflation refers to a combination of economic conditions, not just one. During a recession, policymakers can turn to expansionary monetary and fiscal policies to stimulate the economy, but these same policies exacerbate the inflationary side of stagflation. And since inflation is generally experienced by a wider share of the public than job loss, as Steven Wieting, chief investment strategist at Citi Global Wealth Investments, points out, this can lead to a great deal of hurt.

At the same time, the unemployment rate was spiking and GDP growth was declining. That was defined by economists at that time as the process of stagflation, which can be very damaging for individuals, firms, and the market in general. Further, any opinion or estimate is made on a general basis and subject to change without notice. Therefore, no representation is made as to the completeness and adequacy of the information to make an informed decision. You should carefully consider (i) whether any investment views and products/ services are appropriate in view of your investment experience, objectives, financial resources and relevant circumstances.

Although it is a relatively rare phenomenon, it is essential to understand its implications and potential consequences. Central banks ease monetary conditions when the economy is heading toward recession. They can’t do that when inflation is high, however, and that’s potentially worrying.

Slowing GDP Growth

As an example, the end of the gold standard (where currencies were directly linked to gold) is widely considered to have contributed to the stagflation in the U.S. in the 1970s. It has been next to impossible to buy a new car, the inventory of homes on the market has been at an extremely low level, and many industries have been grappling with various supply chain problems. However, we’ve now seen very clearly that stagflation can and does occur. However, aside from a brief but severe recession due to the pandemic lockdowns in 2020, the economy muddled through, with gross domestic product (GDP) mostly positive and relatively steady. McMillan says that paying attention to both the underlying data and the headlines is important.

What Is Stagflation and How Can Investors Prepare?

• And it forces central bankers and policymakers to devise new ways to solve the problem.
• Treasury bonds, while potentially benefiting from falling rates, are negatively impacted by rising inflation, which erodes income and puts pressure on yields.
• If you want more tactical advice, consider overweighting defensive stocks in sectors such as consumer staples, utilities, energy and healthcare, Brochin says.
• Stagflation is a rare economic phenomenon that presents a significant challenge for economists.

GDP declined by 0.3% in the first quarter of 2025, the Bureau of Economic Analysis estimates, the first time the US economy contracted since 2022. The scenario has largely been triggered by President Donald Trump’s tariffs, Sløk wrote in a white paper published on Monday. When businesses and industries become less efficient in producing goods and services, productivity declines.

Many of us have experienced what living in a stagnant economy is like but will be unfamiliar with stagflation. Judging by its criteria—an economic slowdown where people are losing their jobs while bills keep on rising—and accounts from the 1970s, it’s clear that everyone would be better off if it remained history. Stagnant growth and high inflation can do great damage to an economy and leave scars for years to come.

Impact on Government Policies

The very forces causing this suffering cripple a nation’s 50 pips a day forex day trading strategy ability to compete globally. Businesses face higher operational costs, making their exports uncompetitive internationally. Simultaneously, the currency of a stagflation-stricken economy inherently loses value against other countries, as inflation erodes its intrinsic worth and the lack of growth offers little incentive for foreign investment.

And the unemployment rate, by standards of several decades ago, continues to be very low. Currently there is a lot of uncertainty relating to economic policy, and that creates problems for individuals and firms trying to plan for the future. Stagflation hits individuals hard, as their hard-earned money buys less due to soaring prices and job prospects dwindle and wages stagnate.

• Recessions, however, may lead to lower prices due to decreased demand.
• “Headline consumer price increases have already slowed sharply, but it takes two full years for monetary policy actions to be fully felt in consumer prices.”
• The scenario has largely been triggered by President Donald Trump’s tariffs, Sløk wrote in a white paper published on Monday.
• Even before the U.S. attack on Iran increased economic uncertainty, economists predicted it would decline again, leading to stagnant economic growth or even a recession.

Stagflation is an economic phenomenon characterised by the simultaneous occurrence of high inflation, stagnating economic growth, and elevated unemployment rates. This rare combination poses significant challenges for policymakers and investors alike. A low level of inflation is normal and arguably desirable when an economy experiences sustained growth.

Additionally, fostering economic growth and productivity through strategic policies is crucial. Stagflation emerges when inflation surges or rises significantly, economic growth decelerates, and unemployment maintains a persistently high level. This scenario poses a challenge for economic policymakers, as efforts to reduce inflation might worsen the unemployment situation.