The Fed meets today & tomorrow to tackle soaring inflation, but stagflation risks cannot be ignored.
Stagflation occurs when slow economic growth coincides with rising inflation.
U.S. inflation is at a 40-year-high due to supply chain disruptions & persistent demand. To bring inflation down the Fed must make goods more expensive by increasing interest rates to slow down borrowing & consumer spending.
Why this matters
While higher interest rates have historically proven to kill inflation, it’s also led companies to decrease labor costs. As a result, workers saw their income stagnate relative to productivity.
Stagflation poses significant threats to economies as there is no monetary policy that can do something about it. Generally, Economists believe that productivity has to be increased to the point where it would lead to higher growth without additional inflation.