Stagflation Proof

Stagflation

• A term combining “Stagnation” and “Inflation” means weak growth (GDP) and inflation

happen simultaneously.

• A phenomenon demolishes the trade-off between inflation and unemployment in Phillips Curve Theory.

Phillips Curve & Aggregate Supply Curve

• Referred to aggregate supply curve (AS), increase in the price level is associated with higher levels of aggregate output (GDP) ↑ .

• As aggregate output increases, unemployment decreases ↓ .

• Applied in Phillips Curve, when

(A) GDP ↑, Unemployment ↓ and Inflation ↑

(B) GDP ↓ , Unemployment ↑ and Inflation ↓

• Therefore, low inflation (with low GDP) and low unemployment (with high GDP) can’t be achieved at the same time.

• However, how can stagflation happen during which economy simultaneously face

High inflation, High unemployment, and Low Growth?

Aggregate Supply Shock
(sudden, large increases in resource costs… ex. Oil Price)

• Because costs increase, all suppliers decrease their production, so Aggregate Supply Curve shifts left, and Phillips Curve shifts Right

(This chart is an example of how Phillips Curve acts when stagflation happened in 1970s. It shifted right, and high inflation and unemployment both occurred)

Stagflation had happened in 1970s…

Are we entering another stagflation now?

• Considering the stagflation cause, aggregate supply shock, and comparing the oil prices in 1970s and mid-2000

In Conclusion

I believe today stagflation is happening… and the we as investors must be prepared

GDP ↓ Unemployment ↑ Inflation ↑

The main cause of stagflation, oil price is rising crazily!

Presenter: Yen Po Chang on March 4, 2008