Sunday, October 19, 2008

Learn the lingo: Stagflation

It's been a while since I've done a "Learn the lingo" piece, so what better way to jump back into the mix than with "stagflation?" I know that lately you've all heard the term tossed around with the same frequency that the elusive "Joe the plumber" has been referenced, but do you truly know what stagflation is?

You may not be a whiz at economics or even like the subject very much (I'm the first to admit, the two econ classes I took in college were -- and still may be -- the bane of my existence), but forget any premonitions you have of the subject being too complicated! I know -- it's taught as such a boring, dull and downright tedious thing, but it's actually quite exciting and fabulous once you understand it! Not only that, it's so simple to understand that everyone -- especially us girls -- should have a basic understanding of the broader terms and concepts. Believe me, it doesn't take a finance degree to get any of this!

So what is stagflation, exactly? Simple! When a country experiences high unemployment and slowed economic growth, it's called "stagnation." Growth and jobs essentially become stagnant ... get it? Now toss into that mix a rise in prices (or what many call "inflation"), and you've got a potent cocktail of factors that ultimately create stagflation. I prefer shaken, not stirred.

If you're like me and can't remember what day it is, much less some economic theory, just think of it this way:

Stagnation + Inflation = Stagflation

See? It's as easy as cherry pie! Stagflation is merely when prices are growing but the economy isn't.

But before you cast off the term as one of those monotonous historical things coined a zillion years ago, the word actually hasn't been around forever. In fact, it's a relatively new term, first made up by economists in the 1970s (yes, disco balls, platform shoes and all) to describe the "unprecedented combination of slow economic growth, high unemployment and rising prices" that was occurring at that time, according to Barron's Finance & Investment Handbook.

For some quick background: The 1970s was the last time in U.S. history when a high dose of stagflation was swallowed by the American public. Back then, oil took center stage when the price of it rose globally, which caused extreme inflation in many developed countries, including the United States.

In the 70s, "people began to expect continuous increases in the price of goods, so they bought more. This increased demand, pushed up prices and led to demands for higher wages, which pushed prices higher still in a continuing upward spiral," according to a report by the U.S. Department of State. Then, when unemployment began to occur in higher numbers than usual, the upward spiral descended into what was a terrible recession.

As you're well aware of, consumers (meaning all of you and moi) bear the brunt of the stagflation storm. The price of food, gas and clothing (among other things) goes up, while raises, bonuses and maybe even jobs (for some of us) get harder to come by. Wondering why that burrito bowl at Chipotle is 50 cents more than usual, or why those shoes cost thatmuch more these days? Yup, stagflation is the culprit. On top of the current credit crisis, getting loans in a stagflationary environment is harder because banks may begin to restrict credit to fight the feared "s" word, which is extremely hard to correct due to its contradictory nature.

So now you know exactly what stagflation is and what causes it. No stuffy finance degree required! (Thank God.) For an excellent and very easy-to-read article about potential solutions to stagflation, read Fortune Magazine's piece published in May of this year.

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