Rising energy prices and supply-chain gridlock have resurrected conversations about stagflation—a period when sputtering economic growth and joblessness coincide with rising inflation.
Stagflation is a combination of stagnant output and rapidly rising prices.
Stagflation has been in the press a lot lately as financial analysts fear the toxic cocktail of rising prices and slow economic growth.
Post-pandemic supply chain bottlenecks, combined with rising energy prices and the economic effects of the war in Ukraine are seen as the main contributors to the current economic challenges.
The rise in energy prices is already starting to impact the profit margins of businesses. There is also an intense shortage of human capital which is driving up the cost of hiring good people as firms compete to attract the best and brightest talent
What is stagflation?
High inflation is seldom accompanied by a period of stagnation, but when the two coexist, the economy is in a state of stagflation. During these times, the prices of goods and services increase while economic growth remains sluggish and unemployment rates rise. In other words, prices are rising, and purchasing power doesn’t keep pace.
Typically, a slow economy would reduce the demand for goods and services, driving prices down. However, stagflation’s dual characteristics compound each other.
Rising prices put a major squeeze on the unemployed or those living on a tight budget. As the unemployment rate rises along with prices, people are forced to go into their savings more often. As consumer spending slows, business revenues decline, with business-to-business (B2B) companies also suffering.
What Causes Stagflation?
Economists argue about the root causes of stagflation.
In general, the stage is set for stagflation when a supply shock occurs. This is an unexpected event, such as a disruption in the oil supply or a shortage of essential parts. Such a shock occurred during the COVID-19 pandemic with a disruption of the flow of semiconductors that slowed the production of everything from laptops to cars and appliances.
Such a shock can affect all of the factors that make up stagflation: inflation, employment, and economic growth.
How Stagflation Affects Small Businesses
Small businesses are paying more for supplies, utilities, and financial obligations. Those costs are passed on as higher consumer prices, as businesses are forced to raise prices. It’s a trade-off.
Spiking Oil Prices
The rise in the prices of oil and gasoline/diesel has reached historic levels. The rate of inflation for oil and gasoline/diesel has been staggering. The country is facing an oil crisis, with the winter months to come.
Rising Interest Rates
When the Federal Reserve raises interest rates, the central bank responds to raise interest rates. The cost of borrowing capital increases for small businesses. Many small business loans have variable rates of interest. The rising interest rates increase the amount of monthly payments.
Supply Chain Issues
These issues will continue, as manufacturers struggle to find raw materials, and also sustain the costs to deliver the materials.
As prices rise, consumers drawback spending habits, especially on luxury items.
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