You may have heard economists talking about the risk of “stagflation” following news the US economy shrank in the first quarter of 2022. But what is stagflation exactly and should you be worried?

The US Bureau of Economic Analysis released its GDP estimates and Corporate Profits for 2022’s first quarter on Thursday, April 28. The main takeaways from the report were a decrease in real GDP of 1.4% and a decrease of real disposable income of 2.0%. The decrease in GDP was mainly attributed to the outbreak of the Omicron variant which caused a general slowdown in the economy primarily due to workplace absenteeism.

The less-than-optimal report has added to a new narrative of stagflation that is beginning to be a buzzword for financial media outlets worldwide.

What is Stagflation?

Firstly, stagflation is defined by three main characteristics:

1.  High Inflation

2.  High Unemployment

3.  Low Growth

Why do we care?

A combination of the three ingredients above can lead to a very dangerous economic cocktail which we have not seen since the 1980’s. Achieving Stagflation inherently means a recession has already begun but what makes it different is the difficult position that it puts central banks in. They can attempt to raise interest rates to combat inflation but that will have an adverse effect on the unemployment. And vice versa, if they attempted to stimulate the economy through lower rates then we could encounter runaway inflation.

The good news is that we only meet one of the three characteristics of stagflation (high inflation) but there is concern that we could reach high unemployment and lower growth sooner rather than later due to several economic headwinds such as:

·     Russia/Ukraine War: Gas, Wheat, and Fertilizer costs rising worldwide

·     China COVID-19 Lockdowns: Supply chain bottleneck (shipping + manufacturing)

·     Rising Rates: Central Banks raising interest rates to combat high inflation

·     Geopolitical Risks: Rising tensions could throw us back into a cold war era

As it stands right now, we are at record low unemployment and have had significant growth since the COVID-19 pandemic nearly forced the global economy to a standstill but with the slowing GDP report released and several factors at play, stagflation could be on the horizon.

If you have any questions about today’s Market Update, you can call us at 604-643-0101 or email cashgroup@cgf.com