The economic uncertainty in our country in the wake of the pandemic and the ongoing war in Ukraine have sparked fears of stagflation. This term is used to define an economic situation in which a combination of a stagnating economic growth with a strong price inflation, as is happening with petrol and electricity.
Although it may seem an unprecedented situation, some historical examples may help to understand this phenomenon. If you have become aware of this fact and it is causing you uncertainty as the person in charge of your company, here are the keys to face it and deal with the consequences. Take note of it!
In summary, stagflation can be said to be caused by a situation of sluggish economic growth, generally with high rates of unemployment. unemployment, accompanied by an increase in the prices. This generalised price increase is commonly referred to as the inflation; The particularity of the phenomenon is its combination with economic stagnation.
Slow economic growth should result in rising unemployment but, by itself, it should not lead to rising prices, quite the contrary. This is precisely why stagflation is paradoxical and, moreover, worrying. At a general level, rising unemployment results in a loss of purchasing power for consumers. If we add to this a progressive rise in prices, we get a situation in which what consumers have in their possession is not only a loss of purchasing power, but also a loss of purchasing power. loses value progressively.
An example of this was the stagflation caused in the 1970s in the United States by a rise in oil prices and public social and military spending. This led to employees demanding higher wages. The rise in company wages in addition to the rise in the price of goods led to a rise in unemployment, which resulted in a further rise in prices and a fall in consumption.
Consequences may include layoffs, declining gross domestic product and rising prices. On the other hand, there may be distortion caused by speculators.
In our Linkedin poll launched a few weeks ago, we asked you if you thought that wage growth was one of the solutions to end stagflation. 40% of you answered yes.
However, if prices go up excessively, your workers will demand that wages improve in order to be able to afford to buy goods of all kinds. However, if wages catch up with prices, your company could raise the prices of what they sell, which would lead to an endless spiral that would not solve the problem.
As we can see, a stagflation scenario forces an economic system to confront large contradictions. Monetary policies to stimulate economic growth increase inflation. In turn, policies aimed at lowering inflation reduce economic activity and aggravate productive stagnation. When they occur at the same time, inflation and economic stagnation coexist unfavourably: tackling the former means boosting the latter.
It is key! It is a structural element of the economy on which many, if not all, economic factors depend.
On the other hand, your company should focus on R&D to create jobs and research in different sectors to differentiate itself. In this way, you will increase your competitive capacity and you will be able to promote job creation and environmental protection.
In any case, the new economic reality and the uncertainty of the moment pose new challenges for the near future. Understanding stagflation is an essential first step that gives many professionals an overview to adapt their strategies to the urgency of the moment. And you, what solutions do you see possible to curb stagflation? Do you think that boosting productivity or investing in R&D are some of them? Stay tuned to our blog and tell us what you think on social media.
