Idea to know: Stagflation

The news is starting to mention a frightening economic term: stagflation – while marketers likely won’t have to grapple with the problem itself, it will be critical for the discipline to understand its effects.

Why it matters

The threat of stagflation is back in economies across the western world, with UK and US markets increasingly spooked. Bank of America Global Research finds that around 77% of investment fund managers are now expecting “below-trend growth and above-trend inflation” as the likeliest outcome for the next year.

The post-Covid economic recovery is stalling and, in some cases, dipping, at the same time as consumer prices are rising, mostly down to ongoing supply chain problems that have heavily restricted supply. Meanwhile, the price of oil, which has rocketed since Russia’s invasion of Ukraine in late February, has hit household spending on non-essential products.

A short explanation

The first time economists noticed such a phenomenon was during another oil crisis, this time an embargo on the sale of oil from Middle Eastern exporters against nations that had supported Israel during the Yom Kippur War during the 1970s. The effect on the economies involved was a surge in the price of oil, which triggered a period of high inflation that coincided with high unemployment, meaning that economic output declined or stagnated. 

Stagflation, otherwise known as recession-inflation, means a period of high inflation (i.e. rising prices) along with stagnation or decline in GDP, either through high unemployment or through stagnant GDP growth thanks to low productivity.

Both are contradictions in terms that spooked the economists that first observed the effect, as economic stagnation or unemployment shouldn’t, theoretically, lead to rises in prices.

A problem with no antidote

But the big trouble is that there is no definitive antidote for central banks to administer. In many ways, the tools they would use to combat inflation (raising interest rates) tend to raise unemployment while the tools to combat unemployment (fiscal stimulus or spending to boost growth) tend to spur inflation.

The problem is, therefore, very serious and difficult to solve without causing huge amounts of pain. In the 80s, inflation was brought to heel through extremely high interest rates (of around 20%), which triggered a recession and extensive unemployment. But external factors were also critical to ending stagflation, with the normalisation of oil prices coinciding with a normalisation in western economies.

Modern economists suggest a better path is to aim to raise productivity to spur more growth without causing inflation. Some even suggest that a way to fix the problem is to get people working less through four day work weeks or more public holidays, and spending more on sectors with lower-inflation such as culture and hospitality services and less on inflation-prone goods. 

What it means for marketing

These are big issues, far beyond most marketers’ (and even beyond most central bankers’) control but the big worry is that the perception of crisis, especially as companies start to worry about their profitability, causes firms to respond by cutting jobs.

At a time when fuel and therefore transportation costs remain high, a hit to employment means a hit to demand not only in high-inflation sectors like automobiles but across the economy. Ongoing problems with supply chains and the price of oil can’t be solved by cutting jobs alone.

This is a big issue, but it will eventually end as oil prices (hopefully) normalise or alternative sources of renewable energy are found or developed. Protecting the fundamentals of the business will be crucial for all brands in the meantime; investor jitters are a problem, but high unemployment is a far far bigger one.

Recessions are critical times for marketing where brands must adapt to reflect consumer necessities, as buyers need to be able to justify their purchases. Smart marketers also use them as opportunities to build brands more cheaply as competitors scale back their marketing to save money. Similarly, this is in many ways an oil crisis – it’s an obvious time for brands to press for sustainability, and to press for less reliance on oil across our societies at large.

Times of major economic trouble require collective solutions, which is a problem when our system values each individual and company looking out for themselves and their own profit. Marketers should care about pricing, not only to maximise profit but to keep customers onside at a time of fuel-induced poverty. For both humanitarian and macroeconomic reasons, brands should hope and strive for an end to Russian hostilities against Ukraine.

Sourced from the FT, Fox Business, New Statesman, WARC