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Category: Soap Box

Soapbox: Stagflation is on its way

What to do when inflation surges and economic growth slows? What to do in a period of stagflation? Stagflation seems to be on its way, according to re...

19 April 2022

Gary Mead

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What to do when inflation surges and economic growth slows? What to do in a period of stagflation? Stagflation seems to be on its way, according to research by the Financial Times and the US Brookings Institution. They report that stagflation “will hit the global economy this year… mounting price pressures, slipping output expansion and sagging confidence will all pose a drag for most countries” and “policymakers will be left with ‘grim quandaries'”.

On top of the cost of living crisis – according to a UK charity one in eight British adults say they have “gone without heating, water or electricity in the past three months”, while in the US one in three households is classified as ‘financially fragile’, we may soon be experiencing a crisis of fewer jobs. Stagflation normally occurs when there’s a negative supply shock – such as right now, when fossil fuel energy sources have become much more expensive.

People are understandably tightening their belts; but this overall lower spending in an economy can quickly push economic growth into stagnation. Some of those companies that most benefitted from the lockdowns imposed by governments during the Covid pandemic are showing vulnerability under the pressure of inflation. In the UK, subscriptions to video on-demand streaming services are being cancelled in record numbers; a “desire to save money was the most important reason for the cancellations”. Shares in Netflix up to 11 April have dropped by 43% so far this year.

Around the world, consumer spending accounts for the biggest slice of gross domestic product (GDP), around 60%. A buoyant economy is conventionally measured by GDP growth. If people stop spending because inflation puts items beyond their pockets, then recession is not far off – and a spiral of decline could set in. According to Bank of America’s monthly survey of roughly 300 respondents managing a collective $1 trillion in assets, 60% now predict “a bear market in 2022” (i.e. a period of prolonged price declines) and more than 50% expect that high inflation will be ‘permanent’. Stagflation combines the bad economic effects of a recession (stock market declines, unemployment increases, housing market dips) with inflated prices.

What can individuals, who have no control over policy, do in these circumstances? When stagflation weather darkens the horizon, what’s the best protective clothing?

Gold – a good umbrella

The graphic below, from the British-based asset management company Schroders, tells its own story. In periods of stagflation, since 1973, gold has clearly been the best performing asset, showing real (i.e. inflation-adjusted) annual returns of 22.1%. If Bitcoin had been around in 1973 maybe it would have made it into the graphic.

Schroders says: “clearly, the best and worst performers vary considerably across each phase and the dispersion of returns within in each phase has also been stark” meaning that the overall final average disguises ups and downs). The company continues: “Gold is often seen as a safe-haven asset and so tends to appreciate in times of economic uncertainty. Real interest rates also tend to decline in periods of stagflation as inflation expectations rise and growth expectations fall. Lower real rates reduce the opportunity cost of owning a zero-yielding asset such as gold, thereby boosting its appeal to investors”.


Today, consumers will be most obviously noticing the price rises in gasoline and diesel; maybe they have also been feeling spending pain in their weekly grocery baskets too. In the US, the prices of meat, poultry, fish and eggs is 13% higher than in February 2021, while fresh oranges have gone up by more than 14%. In the UK, some supermarket pasta brands have gone up 56%, tomato puree by 33% and other staples by 20%-32% in the past six months. Road transport fuel costs rise; so too does the price of everything that is carried by road. ‘Shrinkflation’ (aka penny-pinching) is back – manufacturers are cutting back on the contents of products but charging the same price, hoping to kid customers; bottles of Dove body wash recently dropped from 24 to 22 ounces in the US but can still be sold for the same price; PepsiCo-owned Gatorade has made a 14% cut in the size of its sports drink bottles.

Stagflation hit the US economy badly around 50 years ago, when the price of crude oil doubled between 1973 and 1975 as a result of an oil embargo by Opec (the Organization of Petroleum Exporting Countries); US unemployment went from 4.6% in 1973 to 9% in 1975.

We are in a highly unusual position right now, when several crucial commodities – such as wheat, sunflower oil, and fertilizer, not just crude oil – have become much more expensive and their supply is lower than we have been accustomed to, thanks to Russia’s invasion of Ukraine. The world food price index for March from the UN’s Food and Agriculture Organization (FAO) rose to its third record high in a row, jumping 34% from the same time last year, and 12.6% higher than in February, a rise that the FAO calls a “giant leap”. Cereal prices are up 37% in the last 12 months, says the organization. The US Department of Agriculture said in early March that fertilizer prices have “more than doubled since last year due to many factors including Putin’s price hike, a limited supply of the relevant minerals and high energy costs, high global demand and agricultural commodity prices, reliance on fertiliser imports, and lack of competition in the fertiliser industry”.

Your box of breakfast cereals has perhaps already gone up in price; if not, it soon will. Higher food prices will hit some people, some countries, much more than others; the World Bank has warned that high commodity prices, collapsing trade growth, rising interest rates and a stronger US dollar will exacerbate fiscal pressures in many countries, making it harder for net importers to service mounting debts. We can see from the example of Sri Lanka what can happen to a poor country, which is dependent on imports for most of its essential items, when it cannot afford to service its foreign debts.

So, what to do in the face of stagflation?

Holding cash is definitely unwise – your unit of fiat currency today will be worth less tomorrow or in months to come. Fiat currency has changed frequently over the past few hundred years and, as pointed out by Deutsche Bank, “just because the current framework is all that we know, doesn’t necessarily mean it will carry on forever… Fiat money has only been the dominant framework for a small fraction of history and as such it shouldn’t be too controversial to suggest it may not always be the system of choice. With endless structural deficits and extraordinary levels of money printing, we have certainly stressed its flexibility in recent years”.

At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.


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