Healthy, growing economies will always experience slight fluctuations in inflation.
Inflation, as we discussed in a previous post, is an economic condition where there is a sustained rise in the prices of products and services (or, in some cases, the sustained fall in the value of currency).
But while controlled inflation is a product of economic growth, inflation can be treacherous when taken to extremes.
In this post, we’ll discuss two dangerous types of inflation: stagflation and hyperinflation.
Stagflation occurs when there is a sustained period of high inflation combined with high unemployment and no economic growth. A seemingly contradictory condition, stagflation is characterized by a simultaneous rise in prices and a decline in economic output. Stagflation rarely occurs in a normal market economy, as a slow economy typically reduces consumer demand, driving prices down.
If you look at the components of Stagflation below, it doesn't seem like...
In a scramble to keep the economy from plummeting into a depression during the COVID-19 crisis, the US Government signed off an unprecedented $2.3 trillion in relief to support households, employers, financial markets, and state and local governments. And discussions continue on providing a second stimulus package worth an additional $1 trillion.
For the most part, this money is coming essentially out of thin air.
But conventional wisdom has held that governments cannot simply create money on such a massive scale and continue propping up the markets without triggering inflation.
Should investors be worried? To understand whether inflation is likely to become a risk in the near term, let’s take a closer look at what inflation is, what causes it, and how you can protect yourself.