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Personal Finance Terms: What is Stagflation?

Wednesday, December 26 2007

One of the terms that you might have heard recently is "stagflation." Alan Greenspan warned of stagflation not too long ago. But what does this strange word actually mean? Well, for many, it means that things may be heading in the direction of a recession.

Stagflation: A definition

Stagflation is a combination of the words "stagnant" and "inflation." It is an odd pairing, because inflation usually accompanies economic growth. But in cases where prices rise (inflation) and economic growth remains the same (stagnation), or even drops, you get a strange economic blend. And this is rarely good for your personal finances, no matter your portfolio.

Stagflation means that your wages are unlikely to increase, but you will still have to pay for rising prices on things like food, gas and consumer goods. And stagflation is not a good thing for investments, either, since it cuts into profits without offering requisite growth.

There is a great article on stagflation by Jeff Pietsch on Seeking Alpha. I encourage you to read it since, as Pietsch points out, "A long enough period of stagflation almost always precedes recession."

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Latest Comments

Thanks for yet another interesting article. You started off with a statement that most of us have probable heard of stagflation. In fact, I felt a bit abashed at not really knowing what this word meant. Boy, was I relieved to read your definition in the paragraph immediately following. Thanks for the lesson. I look forward to some more educational reads from you. One question, is this stagflation a sign that things are about to get really bad for businesses, considering that investors might choose to refrain from investing due to stagflation?

Comment By: Robert Luedingh  |  1/7/08 at 6:07 AM Personal Finance Terms: What is Stagflation?

Whenever an economy struggles, fear of investing is visible. And if stagflation does really take hold, bringing us into a recession, businesses will have problems. For the intrepid, and those willing to do good research, though, a recession is the time to buy quality stocks that will recover.

Comment By: Miranda Marquit  |  1/8/08 at 12:00 PM Personal Finance Terms: What is Stagflation?
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