Are we in a time of Stagflation?

The latest report shows that inflation has increased to 6.2%, which is the highest it’s been since the 90s. Obviously, this has spooked many people.

In the immediate aftermath of the report, people began selling bonds. This drove down the price of bonds, and the “yield” from those bonds spiked.

A bond’s yield is the return that investors can expect. For the increased risk due to inflation, investors are signaling that they need more compensation to stay invested in bonds.

In the meantime, stocks have also taken a tumble as investors got spooked.

For some investors, the high inflation rate is bringing back bad memories of Stagflation.

Photo by Adam Nowakowski on Unsplash

What is Stagflation?

During the 1970s, the US experienced what has become known as “Stagflation.” This is a combination of stagnation and high inflation.

At the time, price controls and various other economic shocks increased prices, making it difficult for people to afford everyday goods. For instance, oil prices started to spike. Combine that with protectionist economic policies like tariffs, which further decreased the oil supply, and the price for a tank of gas really started to skyrocket. The economic policies meant that the free market couldn’t bring the prices back under control like it would normally do.

These poor economic policies also meant that productivity slowed down and began to stagnate. A slowing economy leads to higher unemployment. Higher unemployment leads to economic distress, which was only compounded by the steadily increasing prices for goods.

Stagflation surprised many economists, because they believed that high unemployment, and high inflation could not exist at the same time.

Especially for retirees, stagflation creates lots of issues. With high inflation, keeping wealth in cash means losing purchasing power. But because of the stagnant economy, there aren’t many, if any, good place to put the money to work.

But don’t worry: we’ve learned since the last time we experienced it!

What have we learned?

It’s important to remember that most of the financial tools we have at our disposal weren’t around in the 70s. Index funds weren’t available to individuals until halfway through the decade, in 1976! Roth IRAs weren’t created until the 90s!

Back then, there were some common strategies for protecting from this type of economic season. Chief among those was Gold. Gold was believed to hold value in high inflationary times.

The problem with Gold, though, is that it doesn’t produce anything. Any profit you make has to come from getting a good deal on two transactions: the buy, and the sell. If you get a bad deal on one, you’ve eaten away at your profit! To this day, many people believe Gold is a cure-all protector of purchasing power.

However, we now have something even better: Treasury Inflation Protected Securities (TIPS). These are bonds backed by the US Government.

Here’s how they work: Each year their principle is adjusted with inflation. So, if you’re experiencing high inflation, the TIPS will increase in value, protecting your purchasing power. On top of that, because TIPS are bonds, they also pay out interest semi-annually.

Of course, during times of deflation TIPS also decrease in value. When TIPS mature, you are paid either the adjusted principal, or the original principal.

With both of these tools, it’s important to balance the risks, along with the benefits in your overall financial portfolio.

What should you do?

Could one of those tools fit your current financial situation? It’s an important question that needs to take into account your whole financial picture.

Click here to sign up for a FREE Bronze Account. A licensed financial advisor will reach out to schedule a meeting to strategize how to protect yourself from potential stagflation in the future.

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