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The phenomenon of stagflation explained: Should you be worried?

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Definition, explanation and examples

Stagnation plus inflation is considered particularly dangerous because of the negative economic effects that interact here. For example, higher prices are a problem for consumers because their purchasing power decreases. At the same time, companies are laying off employees to cut costs. As a result, those affected cannot avoid having to reduce their consumption. Thus, as incomes fall, economic agents face higher prices. The most important example of stagnation plus inflation is the oil crisis of the 1970s. Skyrocketing oil prices triggered the crisis, which began in the United States. Today, this oil crisis is considered the end of the post-war economic boom.

How is stagflation combated in Germany?

Stagnation plus inflation is considered a phenomenon that is difficult to combat in terms of economic policy. In this context, there are no patent remedies that policymakers can fall back on. It is therefore necessary to develop situation-specific solutions each time. Economists propose a supply-oriented economic policy to combat this. This refers to all measures that start on the supply side of the economy. Suitable instruments include, for example, a reduction in statutory non-wage labor costs.

To combat this, the German government relies on fiscal policy. This includes the Entlastungspaket 2, under which the government pays a one-time energy price flat rate, for example, as well as a one-time child bonus. In this way, aggregate demand can possibly be stimulated. The risk with this approach is that the measure can counteract weak economic growth. At the same time, there is a risk that it will exacerbate the problem of inflation.

As a crisis-proof asset class, commodities defy the general negative trend in times of stagflation

Effects of stagflation on the real estate market

Owners of real estate are exposed to special risks in the combination of stagflation and inflation. Actually, houses and apartments are considered as tangible assets among the safe investments in an environment with high inflation. Many investors deliberately rely on real estate for inflation protection. The problem in this context, however, is the cooling of the economy.

This is because, as economic performance declines, so does the propensity to invest. In concrete terms, this development means that it is harder for you to find buyers for your real estate. Even if you have a prospective buyer, you have to assume that the sales price may not meet your expectations. This makes it harder to implement inflation protection.

Difficulties may also arise with regard to generating returns through rent. Investors in real estate may have trouble finding tenants willing to pay the price they want. This is because in the event of stagnation plus inflation, wages will decline, at least in some industries. Depending on the location, this can have an impact on the leasability of properties.

Inflation vs. stagflation: These are the differences

These are two economic phenomena that are closely related yet have distinct differences. Inflation occurs when prices rise. More precisely, it is an increase in the general price level. This makes purchases at the supermarket more expensive, as well as purchases by businesses. However, wages, which are also part of prices, also rise in the context of inflation. This is because wages are prices that companies have to pay for labor.

If wages rise more slowly than inflation, there is a real wage loss. Consumers have less money available for consumption, and their purchasing power declines. What is special about the combination of stagnation and inflation compared to pure inflation is that while prices rise across the board, wages do not change or even decline.

This is because in the stagnation scenario, there is a slowdown in economic growth. Some companies may have to lay off workers. As a result, people have less income available from dependent employment, but at the same time they have to pay higher prices. For this reason, a combination of stagnation and inflation is considered dangerous.

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