The combination of low economic growth (stagnation) and high inflation is commonly known as “stagflation”. It is basically a double hit of economic pain. High unemployment results in people having less money, and high inflation means their money loses its value. Stagflation can be very painful.
We have stagflation right now. The only reason it’s not worse is that employment numbers are still strong for now. But central banks are raising interest rates at record pace to curb spending. So, the economic outlook is brim.
Central Banks have an interest in higher unemployment because this will result inflation to come down. The fewer jobs there are, the less money people have to spend. So, they will stop spending, and inflation will finally go down. Even inflation eventually goes down, we don’t know how long it will take before we see real benefits.
The 1970s inflation crisis lasted for 10 years! And with the oil crisis caused by the Ukraine-Russia war still going on and the supply chain issues world-wide continuing, there are a lot of uncertainties that could keep inflation around for a while. If you add in a higher unemployment, then we could see the dreaded stagflation all over again in 2023 and beyond.
So, prepare. Stagflation could stick around for a while!
Sven Franssen