by Linda French Aug 21, 2022Share On:
Alternatively, everything old is becoming fresh again. Stagflation in 2022, on the other hand, may not be like the stagflation of 1973–1974, and it also may not look like that of 1978–1979, it could be. Learn more about the implications for small businesses below. Let's set the stage, and reminisce about the economic times of yesteryear.
The definition and causes of stagflation
Stagflation is "a mix of economic stagnation and rising inflation with the added struggle of increased unemployment," according to Fortune. The term "stagflation," according to Investopedia, "refers to an economic situation in which there is both inflation and a fall in the GDP." It appears to be a contradiction. Can't high inflation be the result of anything other than strong economic expansion? Exactly what the old Phillips curve predicted in Economics 101. How can a recession continue? Stagflation in the 1970s was an excellent example to study.
The Great Recession of 1973–1975
Look at this mid-seventies recession with some Lynyrd Skynyrd and get your hip-huggers out of mothballs. What may be the reason behind this? According to Fortune, the OPEC oil embargo. Gas prices increased, and there were long queues at the pump. The cost of crude oil per barrel increased fourfold. OPEC's embargo wasn't put into place in a vacuum. Those policies were put in place by the government, to begin with.
Nixon had removed the United States from the gold standard over a year earlier. This resulted in a massive increase in gold prices. US military help was given to Israel in late 1973. The Arab world was not pleased with this decision by the United States.
How did the 1973–1975 stagflationary oil crisis come to a close? US intervention played a role. We lowered highway speed limits and changed the date of Daylight Savings Time. We also established the Strategic Petroleum Reserve. OPEC members couldn't agree on how long to keep the embargo in place, which contributed to the end of the stagflation.
The Stock Market from 1973 to 1975
The embargo also contributed to the 1973 stock market disaster, lest we forget. Result: The United States second-longest market decline ever is a long one. Of course, that was during the depths of the Great Depression.
In times of need, a business line of credit loan comes to the rescue.
Business credit loans can be used as a wealth builder when the economy is in a downturn. They're useful since they assist providers in raising their prices because of market data on the economy. If, for example, you put off purchasing critical goods, price changes in the economy may increase the expenses by the time you do. However, businesses that use this kind of payment might hedge their chances by purchasing now and paying later.
On June 1, you can buy at June prices and use that money to build your business. To finish paying off your debt, give yourself till September. Using a card with a zero percent APR is an intelligent financial choice and even better if September's costs are significantly higher than June's. Keep in mind that, at the very least, keeping a balance will affect your PAYDEX and other business loan credit score. As a result, we recommend simply possessing a small amount of cash on hand for no more than three months. Corporations, like individuals, are responsible for making their monthly payments on time.
First and Second Verse: Iran, the United States, and Inflation
Your Lynyrd Skynyrd and your hip-huggers should be traded for some Bee Gees and designer trousers. The period from 1978 to 1979 is known as the "second round" of stagflation, and the Iranian Revolution was a factor in the resurgence of stagflation in 1978.
The decline in oil production had an impact on the economy. Speculators, however, were also responsible for some of the changes. Many people engaged in massive speculative hoarding after seeing what could happen to fuel prices. And as a result, a second shock occurred, increasing costs.
Other factors that harmed the US economy included a stock market crisis in the fourth quarter of 1978. The Dow Jones plummeted from 897.09 to 792.45, losing more than 11 percent of its value. Gold and inflation weren't connected this time around. Instead, a crash in the bond market was to blame for the downturn in the economy.
What about the current state of our economy and business cycle?
The ongoing pandemic, among other things, is affecting our economy today. The war going on in Ukraine's lap doesn't help. As a result, supply chain challenges result in delays in the delivery of goods and services.
This includes the current shortages of infant formula and computer chips for automobiles. Customers were unable to get the goods they wanted in either location. If goods and services aren't available for purchase by the general public at reasonable prices, then consumer spending has less impact. As a result of global commerce, we may see changes in our economic cycle.
How Many Others See Negative Economic Growth?
In March of 2022, former Treasury Secretary Lawrence Summers raised the alarm. When the economy gets too hot, it causes stagflation and increases the average amount of unemployment over time, according to his analysis. Summers points out that interest rates must rise to reduce inflation significantly. When it comes to the Fed (and many others), low unemployment is a good thing. Let's face it. Stagflation 2022 is inevitable if inflation is allowed to run wild.
Summers appears to have changed his tune and is now more concerned with inflation. "Over the past 75 years, the US economy has gone into recession within two years every time inflation has exceeded 4%, and unemployment has fallen below 5%," he said. As of now, inflation is above 6%, and the jobless rate is below 4%.
Is There a Chance of a Recession?
Maybe. "A severe fall in general economic activity in a specific region," according to Investopedia, defines a recession. Two-quarters of decrease in the economy had previously been accepted as the norm." In 2020, the United States had its most recent recession. The pandemic's high unemployment rate was directly responsible for the current economic downturn. But that one only lasted a quarter of a year.
Is There a Risk of a Global Recession?
Possibly, given that China is presently dealing with the issue of Covid. Russia's economic sanctions aren't helping matters, either." The European Union isn't out of the woods yet; the eurozone's economic growth is expected to decline. Who is the culprit here? Ukraine's conflict.
Small Business Ownership and Your Financial Recovery
Inevitably, the value of an individual stock rises and falls. Should your company consider raising prices as a result? It's likely to be influenced by the type of business you're in. You may be able to raise prices if you produce something that no one else does, and it's not the same in a competitive arena. Cost-benefit analysis is an important consideration for consumers when making purchasing decisions. Your business will be at risk if your prices are too high for your customers. Consequently, they may resort to a rival.
As a result, even if raw material costs grow, the cost of goods and services provided may have to remain the same. You wouldn't be able to compete in your market niche if you didn't. However, if the cost of industrial production rises, it would make it more difficult for small businesses to withstand an economic downturn.
The Most Important Things to Remember
Is 2022 the year of stagflation? There's no guarantee that there will be a change in the government's policies quick enough to stop it. Our society may resist economic efforts to control growth, and the Federal Reserve may also not be doing enough to boost the economy.
However, if a company has a solid business line of credit loan rating and is willing and able to use it effectively, it can assist itself. They don't have to wait for the economy to be saved.
Learn how business credit loans and financing can benefit your business in any environment by contacting us today.
You may be wondering how to use a business credit loan to try to weather the storm as prices rise and inflation rears its ugly head.
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