Markets fall as investors worry about low economic growth and stubborn inflation rates | CNN Business (2024)

FAQs

What is the relationship between inflation rate and economic growth? ›

An increase in the rate of economic growth means more goods for money to “chase,” which puts downward pressure on the inflation rate. Assume, for illustrative purposes, that the money supply grows at 6 percent a year and velocity is constant. Then, if annual economic growth is 3 percent, inflation must be 3 percent.

Why is Inflation Bad for Stocks? Rising prices of goods and services injects uncertainty into the markets. During periods of rising inflation, corporations profit and growth margins may be hit, affecting investor confidence which in turn affects their willingness to take on risk by holding stocks.

Stagflation refers to slowing economic growth combined with high inflation, which scarred the U.S. economy for much of the 1970s. Stock-market investors have grown concerned that the economy could sink into a similar dilemma since the March consumer-price index report came in hotter than expected.

Stagflation is an economic scenario characterised by stagnating economic activity and high unemployment, while inflation is high and sustained over time. This can lead to a situation in which the economy does not grow and people lose the necessary purchasing power to cope with inflation.

Negative growth rates and economic contraction are also marked by a decrease in real income, higher unemployment, lower levels of industrial production, and a decline in wholesale or retail sales.

Inflation is measured by the consumer price index (CPI), and at low rates, it keeps the economy healthy. But when the rate of inflation rises rapidly, it can result in lower purchasing power, higher interest rates, slower economic growth and other negative economic effects.

Stagflation is a combination of three negatives: slower economic growth, higher unemployment, and higher prices. This is a combination that isn't supposed to occur, in the logic of economics. Prices shouldn't go up when people have less money to spend.

Key Takeaways

Inflation is the rate of increase in the overall price level of goods and services in an economy. Stagflation describes a combination of high inflation and economic stagnation as reflected by a slow growth rate and high unemployment.

Stagflation is a situation of both high inflation and high unemployment; occurs when output is falling at the same time that prices are rising.

Economists have shown that stagflation was prevalent among seven major market economies from 1973 to 1982.

Is the US economy good right now? ›

Is the U.S. economy growing? The U.S. economy has shown steady growth since it dropped to unprecedented levels during the second quarter of 2020 due to the pandemic — and then rebounded almost as quickly.

When stagflation occurs, don't panic, sell your stocks and bonds and invest in rare art, gold, or other unusual commodities. Stagflation is not a good reason to completely abandon a sound investment strategy.

During a contraction

As consumers demand less, businesses produce less output. Some businesses may lower their prices or offer discounts to increase sales. This leads to lower inflation or deflation.

According to this theory, the individuals in the future will receive the return on investment in the form of money. Thus, investment and real money balances will be reduced by inflation. Consequently, inflation will negatively affect economic growth.

In a flourishing economy, price and inflation are interconnected, with economic growth typically leading to a marginal increase in prices, hence a slight inflationary effect. Aggregate supply and demand need to balance effectively to avoid deflation.

Nominal GDP is the total value of all goods and services produced in a given time period, usually quarterly or annually. Real GDP is nominal GDP adjusted for inflation. Real GDP is used to measure the actual growth of production without any distorting effects from inflation.