• Central banks are facing a dilemma of rising inflation and stalling economic demand, leading to the possibility of stagflation.
• Three key metrics that contribute to stagflation are revealed – price level movements, wage growth, and potential output.
• Gold and Bitcoin are responding as safe havens with an increasing demand as central banks’ responses remain uncertain.
Central Banks‘ Dilemma
The current economy is facing a dangerous combination of rising inflation and stalling economic demand, leading to the possibility of stagflation. This difficult situation has created a dilemma for central banks in how best to respond – unveiling the risks of stagflation in the process.
What is Stagflation?
At its core, stagflation is characterized by an increase in prices combined with a decrease in economic output or activity. In other words, it’s when prices rise but wages don’t keep up – leading to less purchasing power for consumers as well as slower economic growth. There are three key metrics which can be used to measure if an economy is heading towards this phenomenon: price level movements, wage growth, and potential output.
Central Banks‘ Response
Central banks have faced criticism from both sides – those who believe their policies have caused inflationary pressures and those who argue that they haven’t taken enough action to stimulate the economy. With such uncertainty surrounding their response, investors around the world have started looking for alternative safe havens such as gold and Bitcoin – both of which have seen an increase in demand since April 19th 2021 when one of the biggest long liquidation events took place on crypto exchanges.
Inflation vs Stagflation
It is important to note that while inflation can lead to increased prices over time, it does not necessarily mean lower economic growth at the same time – unlike what we see with stagflation. In other words, it’s possible for an economy to experience high levels of inflation without entering into a period of stagnation or recession should wages also rise accordingly with consumer spending remaining strong overall.
As we move forward into 2021-22 it will be interesting to see how central banks respond to these pressing issues as well as how investors continue to seek out alternative safe havens amid any potential market turbulence ahead.