Stagflation or Stagnation

Over the last couple of weeks lots of “Stag-words” have been hitting headlines, worrying investors. During market slowdowns, money will seek high yielding places as economic indicators begin to show mixed signals, confusing investors as to where the economy is heading. For an investor to make money he/she must understand economic issues and how it will affect his/her trading decisions.
Stagnation – A period where economic growth is relatively small (2-3%).
Stagflation – A period of stagnation accompanied by high unemployment and inflation.

Even though recent published data are showing the start of high Unemployment and the rising Prices (Inflation), Stagnation/stagflation is still irrelevant as Growth remains intact (shown above). The Government’s enormous trade deficit, caused by continuous consumption, is gradually causing the U.S economy to dig its own grave, while a low dollar (caused by the decrease of interest rates) is only helping spur inflation in other countries as its low value encourages those countries to import, buying at lower prices than what it costs them to self manufacture. In addition to recent financial crises along with Sub-prime problem that are demanding lower rates, Unemployment levels have started to become a slight issue. When balancing on a scale unemployment against inflation, unemployment will normally receive more of a priority as government’s will try to prevent recessions
rather than fight the cost of living which is can be measured only in relation to past consumption.
Interest rate reductions allow more money to circulate, creating more growth and more job
opportunities.
Even though we are normally familiar with raising interest rates to prevent inflation, governments and central banks do work together and are capable of fighting uncontrolled inflation if it is necessary, for example tax increases which can curve consumption.
In conclusion, while two out of the three factors are just starting to hint towards stagflation, there still remains one factor that has recently showed growth of 4.9%. Even though oil prices are sky high one has to remember that though previous recessions started similarly inflation remains relatively low today, especially when compared to the 1980’s.