Financial encyclopedia

Recently, the US economic data has sent out contradictory signals - the economy is slowing down, but prices remain stubbornly high. A new term has begun to circulate in the market: "Stagflation-Lite". 

What is stagflation? 

The term "stagflation" is a combination of "stagnation" (economic stagnation) and "inflation" (inflation), meaning that while economic growth is sluggish, prices continue to rise. Under normal circumstances, when the economy slows down, demand weakens and prices fall; or when prices rise, the economy still has growth support. 

But stagflation disrupted this balance, creating a predicament of weak growth and high inflation. 

The three major characteristics of stagflation 

The decline in GDP growth rate indicates insufficient economic momentum. 

Rising unemployment - companies' revenues decline, recruitment slows down 

Prices continue to rise - even as demand weakens, cost pressures still push up prices. 

The simultaneous occurrence of these three factors is often a warning sign of stagflation; if the situation is less severe, it is what is called the "Lite version". 

Take the current situation in the United States as an example. 

The economic growth rate has slowed down, and the job market has shifted from "red-hot" to "moderately warm". 

Overall inflation was moderate, but core inflation rose to a five-month high. 

The dilemma of central bank decision-making 

Interest rate cuts to stimulate the economy → may lead to a recovery in consumption and investment, but could also push up inflation and worsen price pressures. 

Interest rate hikes to curb inflation → Prices may fall, but financing costs rise and the risk of economic recession increases. 

Meanwhile, wage growth often fails to keep pace with the increase in prices, weakening consumer confidence and creating a vicious cycle. 

A typical case in the United States in the 1970s 

In the 1970s, two oil crises pushed up energy prices, and the US inflation rate once reached double digits. The economic growth rate slowed significantly. At that time, the Federal Reserve was indecisive in its policy orientation. As a result, it failed to control inflation and prevent economic recession. Eventually, it could only suppress inflation with extremely high interest rates, at the cost of a prolonged economic downturn. 

How should investors deploy? 

Under Stagflation-Lite, a defensive and hedging strategy is advisable. 

Defensive stocks: industries with stable cash flows such as consumer staples and utilities. 

Inflation hedging: gold, energy and other bulk commodities 

Short-term debt and cash: reducing interest rate risk and retaining liquidity to cope with volatility 

Although Stagflation-Lite may not evolve into a full-blown crisis, it is sufficient to increase market volatility and policy uncertainty. Investors should remain flexible, balancing defense and opportunity, and grasp the equilibrium amid the changing situation.