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Stagflation is an economic phenomenon marked by slow economic growth and rising prices. In this article, we'll take a look at how stagflation is measured, what factors contribute to it and how to protect your finances.
How Is It Measured?
Stagflation is not measured by a single data point, but rather by examining the direction of a variety of indicators over an extended period of time. While the direction of a single indicator does not necessarily indicate the potential for or the presence of stagflation, when the indicators are considered in aggregate, a picture of the economy's health emerges. When an increase in certain indicators occurs over a long period of time and is coupled with declines in other indicators, stagflation is said to be occurring. (For related reading, see our tutorial Inflation: What Is Inflation?)When "Up" Is a Bad Sign
Rising prices and rising unemployment are two of the data points used in attempts to determine whether stagflation is threatening the economy. While hikes in the cost of food, energy or other individual items are generally not perceived as signs of stagflation, a broad-based rise in the cost of goods and services is something to be concerned about. There are several ways to track such rises, including monitoring trends in the Producer Price Index (PPI) and the Consumer Price Index (CPI).The PPI measures the average change in selling prices received by domestic producers of goods and services over time. From an investment analysis perspective, it is very useful for analyzing potential sales and earnings trends in a variety of industries. From an economic analysis standpoint, movements in the PPI show whether the cost of producing goods is rising or falling. (To learn more about this economic barometer, read Economic Indicators: Producer Price Index (PPI).)The CPI measures the weighted average of prices of a basket of consumer goods and services. When tracked over time, the CPI provides insights into the direction consumer prices are headed. The CPI is often referred to as "headline inflation." When the CPI number is rising, fears of inflation come to light. The Federal Reserve likes to see the CPI rising at a rate of less than 2% per year. (For additional information, read The Consumer Price Index: A Friend To Investors.)Price increases aren't the only rising indicator that suggests the possibility of stagflation. A rising unemployment rate is another indicator. (For more insight into how employment is measured and perceived by certain markets, read Surveying The Employment Report.)When "Down" Is a Bad Sign
Declines in gross domestic product (GDP) and productivity often indicate an ailing economy. GDP tracks the monetary value of all the finished goods and services produced within a country's borders in a specific time period. In healthy economies, this number is generally rising.
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