What is Stagflation and What Does it Mean for Business Owners?

April 14, 2021
  • facebook
  • linkedin
  • twitter
  • google plus

After a tough 2020 for so many industries, it’s nice to see the economy slowly recover in 2021. We’re a long way from where we were in 2019, though, and this recovery faces some major challenges ahead. One issue some economists are concerned about is stagflation.

What is Stagflation?

Stagflation is a unique economic trend where three specific factors are happening simultaneously:

  1. Slow Economic Growth
  2. High Inflation
  3. High Unemployment

Are We Experiencing Stagflation Right Now?

The question is if we are truly in a state of stagflation right now. Yes, we are in a state of slow economic growth coming out of this pandemic that has wreaked havoc on the economy, especially in the foodservice and entertainment industries. The good news is the recovery seems to be happening steadily. It will just take awhile.

We are also seeing steady inflation. Many economists are predicting significantly increasing inflation rates in the near future. Be sure and read our article from last week about inflation and how it affects long-term financial planning. [Click here to read.]

The last factor is less certain. We obviously saw huge unemployment rates during the height of the pandemic as businesses were forced to shut down. As the world continues to open up, however, we are seeing this number shrink rapidly. Here in California, the unemployment rate was at an all-time high in April 2020 (16.0%). It currently sits around 8.5%, which seems like a positive recovery. However, it is still far from the historic low rate of 4.1% back in November 2019. These numbers are according to the Bureau of Labor Statistics. Many businesses that closed down in the past year aren’t opening back up and those that are may not be hiring as aggressively. Unemployment is heading in the right direction, but again is far from where we’d like it to be.

So, are we really in a state of stagflation right now? All signs point to it—at least on some level—but nobody is really talking about it. The biggest example of stagflation in U.S. history is the oil crisis of the 1970s. The COVID-19 pandemic is a completely different situation and nowhere near as devastating to the economy.

Stimulus Effects on the Economy

The Federal Reserve and Congress have fought to spark economic growth with the various stimulus packages and PPP loans, but these tend to have short-term affects. Business owners need to plan for all the possibilities ahead, including inflation and possibly some level of stagflation, as well.

Business Planning for Inflation and Stagflation

Businesses may be forced to decrease prices in order increase sales and spur growth. This is hard to do with inflation happening and driving up costs for supplies, real estate and labor.

As a business owner in 2021, you have to find the right balance of financial strategies to not only survive, but keep growing. Having an experienced business advisor on your side can really make a difference in such a unique economy. The financial experts at Illumination Wealth are here to help you with the business guidance and financial planning services you need. Contact us today to schedule a no-obligation introductory consultation.