Snatching your economy from the jaws of stagflation

The increase in prices and low demand is a worrying prospect for governments, policymakers, and above all, low-income populations globally. Fears of impending stagflation have intensified and moved up the political agenda. The last time the world experienced stagflation was in the 1970s, when inflation and unemployment in the United States exceeded 5% every year between 1974 and 1982. Yale University Professor Arthur M. Okun measured the outcome of such an arduous time in the “Misery Index”. Professor Okun calculated the Misery Index by adding the unemployment and annual inflation rates. In 1980, the Misery Index peaked at 20.7, the US consumer price index registered 13.5%, and the unemployment rate was 7.2%. During the 50 years that followed, the US Misery Index fell steadily, interrupted only by the 2008-9 global financial crisis and most recently by the COVID-19 pandemic that caused tens of millions of people to lose their jobs and pushed the Misery Index to its highest level of 13.8 in May 2020. Today, skyrocketing inflation rates across all major economies propel the Misery Index to new heights.

 As the Russian-Ukrainian war continues, commodity prices continue to surge, hurting countries in products and services where Russia and Ukraine are major global exporters. The inflationary winds have been triggered by firming post-pandemic demand and persistent supply disruptions caused by both post-pandemic hangovers and the Russian-Ukrainian war. Expectations are for prices to begin to moderate sometime in 2023 as commodity production rises elsewhere. However, commodity prices are expected to remain above their average of the past five years, considering that Russian supplies of many commodities will take longer to return to the global markets.

Amid elevated inflation levels, the war in Ukraine, and rising interest rates, global economic growth is expected to be weak in 2022. The “known unknown” is how much interest rates need to rise before they begin to bring inflation levels back to targets and avoid a hard landing for the economy. The main challenge is to halt the rapid slide into stagflation.