What is stagflation, and are we heading for a “perfect

Dark skies and choppy waters are predicted, but it’s not so certain we’re facing a “once in a generation” problem.

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Everything old becomes new again.

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On the fashion side, the 1970s has a wide range of retro offerings, like tie-dye jeans and bell bottom jeans.

But if you ask economists, the defining influence in the 1970s – stagflation – would be best left in the past.

Unfortunately, this term, which is often referred to as the “perfect storm,” has been popping up more and more lately as inflation continues to soar and the economy shows signs of slowing.

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So, are those dark clouds looming on the horizon or are we getting ahead of ourselves? Economists aren’t sure, but they agree that a return to stagflation would be just as welcome as a resurgence in Jell-O salads.

Trace the origins of this term

The term “stagflation” was originally popularized by British politician Iain Macleod in 1965, when he declared that Britain faced the “best of both worlds” in reference to inflation and stagnation.

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Macleod’s suitcase came in handy over the next decade, with the 1970s bringing rampant inflation, as well as a recession following a series of oil price shocks. Until then, many economists believed that when inflation was high, it was usually the result of increased demand – a generally good indicator that the economy is strong and unemployment is low.

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Economists usually assumed that meant you couldn’t have high inflation and a stagnant economy. But this theory had to be reworked when high oil prices and rising inflation collided with high unemployment and a recession during the 1970s.

Moshe Lander, an economist at Concordia University, says stagflation is incredibly rare. The world has not seen the convergence of economic conditions associated with this state since the 1970s.

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“This is a once-in-a-generation problem,” Lander says.

We’re starting to see ominous signs

Most economists agree that we are not currently in an environment of stagflation. What concerns them is whether this is where the global economy is heading.

Scotiabank Economic Forecasting Director Nikita Perevalov said in a May report that there are doubts about “the sustainability of…Canadian economic growth” given disappointing manufacturing and wholesale sales figures from March, as reported by Statistics Canada.

And as spring wore on, more and more observers raised red flags. In early June, the World Bank significantly lowered its projections for the global economy, citing concerns Russia’s War in Ukrainethe prospect of widespread food shortages and – you guessed it – “stagflation”.

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In its report, the agency also published its projections for 2023 and 2024, predicting that a series of oil shocks will increase the possibility of stagflation “reminiscent of the 1970s”.

How can we solve this problem?

As the World Bank pointed out in its report, the last period of stagflation demanded such high interest rates that the world sank into a recession that plunged a number of countries into financial crisis.

The Bank of Canada is doing what it can to fight inflation by raise interest rates. There is even speculation that it could raise its target overnight rate by 0.75% at its next meeting on July 13 – but as Lander puts it, there is a risk that could “remove some of the starch of the Canadian economy in the process. ”

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BoC Governor Tiff Macklem is surely feeling the pressure to try to balance the aggressive fight against inflation – which hit 7.7% in May, according to Statistics Canada. Consumer price index — and “sink the economy,” Lander says.

David Chaundy, president and CEO of the Atlantic Provinces Economic Council in Halifax, says the biggest risk economists currently see is if inflation rises for even longer than policymakers expect.

But given the strength of the Canadian economy so far, he isn’t too concerned about stagflation just yet. What he will watch is if the economy slows faster than expected, which could happen if the central bank raises interest rates too quickly.

“This is where we get into a stagflation-like situation,” Chaundy says. “But next year, I think a downturn is definitely in the cards. And that’s partly what the bank is trying to engineer.

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“What’s clear is that interest rates are going to continue to rise at a fairly steady pace until we start to see some kind of noticeable change.”

Red flags to watch out for

What differentiates Canada’s situation from other periods of high inflation, says Chaundy, is that most of the causes are external pressures that the Bank of Canada cannot control, such as Russia’s war in Ukraine and shortages. of the supply chain.

Chaundy says he will start to worry if inflation persists longer than expected. In such competitive labor market, employers may be forced to raise wages in line with inflation to attract and retain top talent. This can then lead to a recession or general slowdown.

But of all the things Canadians need to stress about these days, Chaundy would say that stagflation doesn’t need to be a major concern right now.

“I think it’s the price pressures, what people see [now] and will continue to see throughout this year,” says Chaundy. “I don’t think the risk of widespread job losses is really there this year.”

He expects the economy to stagnate next year, but that’s not a given at this point.

“The next six months will give us a better idea of ​​what 2023 looks like,” says Chaundy.

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.

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