Will The Era Of Stagflation Return?​

By Jake Rickman​

What do you need to know this week?

Many think of “stagflation” as a historic term that described the economic conditions of the 1970s; now, many economists increasingly wonder if it will describe our near future.

Stagflation is a portmanteau of “stagnation” and “inflation”, and under normal economic periods, these two economic phenomena tend to be exclusive.

This is because inflation is normally a sign of a market moving too quickly: there is lots of cash in the market, which means people and businesses are spending more, which drives prices up because businesses are hiring more people and workers are asking for higher wages. The cycle gets out of hand when the purchasing power of money fails to keep up with the rate at which prices rise.

Under this model, the economy is doing too well.

Stagnation refers to periods of negative or flat economic growth. People and businesses spend less money, which means there is less demand for goods and services, which leads to redundancies because businesses are less productive and therefore need fewer employees.

Under many economic theories, it seems unintuitive how an economy can both cause the price of everything to go up, while at the same time employers are cutting jobs and spending less money. But as the 1970s demonstrated, poor monetary policy combined with shocks to the price of energy because of the OPEC embargo did just this.

Why is this important for your interviews?

Being able to analyse why this might be happening now is a good exercise in developing your commercial skills.

Once the pandemic hit, to avoid a recession, central banks lowered interest rates to encourage borrowing and spending money. As we emerged from the lockdown and the demand for goods and services increased, the supply of these goods and services could not meet the demand. Costs began to go up, particularly energy prices, as gas and oil companies had to restart production that they halted during the lockdowns. Cue inflation.

Some central banks started raising rates to slow things down: more expensive borrowing costs mean you can afford to borrow less, so there is less money in circulation.

Then Russia invaded Ukraine and the West imposed sanctions on its economy, including on its ability to export its energy. But because Russia exports nearly a half of Europe’s oil and gas, this means there is less fuel to go around. This makes oil and gas considerably more expensive.

Oil and gas powers our economy: not only do we use them to fuel our cars and ships, but manufacturers use them to produce many goods like plastic.

If these conditions persist (which is not a given), global demand may collapse as prices continue to rise — i.e., stagflation.

How is this topic relevant to law firms?

Lawyers do not advise in a vacuum. They must understand the economic conditions that influence their clients’ decisions: why are they making a whole business division redundant? Why are they changing their hedging strategy? Understanding the wider economic environment is important to understanding the broader challenges facing many clients.