What is stagflation? | Investing Nugget

Did you know that the term “stagflation” was first used to describe the U.K’s bleak economic outlook in the 1960s? 60 years on, this term is mentioned in the same breath as lay-offs, the rising cost of living and other financial woes. Let’s dive deeper into what stagflation means, and how you can brace yourself if and when it comes.

What is stagflation?

Stagflation is a combination of three things- a high inflation rate, a high unemployment rate, and sluggish economic growth.

What makes stagflation so tricky?

This triple-whammy is one that tests the wits of governments. This is because measures to resolve recession, unemployment, and inflation are often at odds with one another. 

For example, to tackle the problem of unemployment and recession, the government needs to pump more money into the economy to encourage businesses to hire, raising economic productivity. 

However, the exact opposite is often needed to quell inflation. The government needs to limit the amount of money circulating to deter businesses from borrowing and spending. That’s because cooling off these behaviours prevents consumer prices from climbing up and up.

What causes stagflation?

Theorists put forth different reasons. Most economists point their fingers at 2 main culprits – supply shock and poorly planned or timed economic policies. 

Supply shock

The theory explains that stagflation occurs when there’s a sudden drop in the supply of a good or service. An example is how the Russian-Ukraine war (and sanctions on Russia) led to a scarcity in oil and gas exports, which caused energy prices to spike. In such circumstances, the surge in energy prices affects industries that heavily depend on it, pulling the brakes on economic growth.

Poor economic policies

At times, policies may aim to grow or reduce the money supply quickly to boost economic growth or to cool inflation. When multiple ill-planned or ill-timed economic policies come together, their combined effect can slow down economic growth and bring inflation to the fore.

Can stagflation spread from one country to another?

There’s no way to sugar-coat this one; the answer is ‘yes’. Our world is highly interconnected, making countries more interdependent than ever. That’s why it’s virtually impossible for countries to be insulated from financial hardships in their wider environment. 

For example, Singapore is a small and open economy. It imports crude oil from Middle-Eastern countries and its water supply from Malaysia. These are key raw materials used in various industries in Singapore. A hiccup in any of these supply chains would impact our economy.

Also, many countries have their currencies pegged to the USD. This means that how well the USD is doing directly affects the health of other currencies. This year, the USD has risen sharply against all major currencies, and this negatively impacts the economy of countries that import goods paid in USD. They will now need to pay more.

Will Singapore experience stagflation? Is it going to affect me? 

It is reported that the Minister of State for Trade and Industry, Alvin Tan, expects Singapore to dodge the bullet (for the time being, at least). Policymakers announced that it’s unlikely for the economy to slip into stagflation next year

That said, challenges to the economy remain. In response, the Monetary Authority of Singapore (MAS) has tightened monetary policy thrice since October 2021. A S$1.5 billion support package will also be set aside to support lower-income Singaporeans.

Phew. Can I still prepare myself in case stagflation does come?

You can, and should! For one, make sure you have at least 6 months’ worth of emergency funds to tide through stagflation if and when it occurs. It is also prudent to look through your expenses to see opportunities to stretch your dollar, such as choosing more affordable alternatives. 

Next, prioritise clearing your debts. Rising inflation often prompts rising interest rates (as part of a tightening monetary policy), meaning that it may become more costly to pay off loans.

In light of rising unemployment, choose to invest in yourself, even if you don’t see immediate results. Keep learning and growing; upskilling helps you remain attractive to employers even if companies start laying off staff.

Lastly, grow your wealth through investing. With inflation reducing your money’s buying power, you’ll need tools to boost your income. Smart cash management tools like Earn+ are what you need. Earn+ has a projected yield of 2 to 2.5% interest p.a*. These expected returns earned with Earn+ help soften the blows of price hikes and that of the general economic downturn.

Wanna grow your emergency fund? Earn+ is perfect for supercharging your money for short-to-medium term timelines (such as 12-18 months)!

Earn more with Earn+ today.

*Projected yield and returns are not guaranteed or protected. Please refer to the latest projected yield and returns.

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Komsan Chiyadis

GrabFood delivery-partner, Thailand

Komsan Chiyadis

GrabFood delivery-partner, Thailand

COVID-19 has dealt an unprecedented blow to the tourism industry, affecting the livelihoods of millions of workers. One of them was Komsan, an assistant chef in a luxury hotel based in the Srinakarin area.

As the number of tourists at the hotel plunged, he decided to sign up as a GrabFood delivery-partner to earn an alternative income. Soon after, the hotel ceased operations.

Komsan has viewed this change through an optimistic lens, calling it the perfect opportunity for him to embark on a fresh journey after his previous job. Aside from GrabFood deliveries, he now also picks up GrabExpress jobs. It can get tiring, having to shuttle between different locations, but Komsan finds it exciting. And mostly, he’s glad to get his income back on track.