Erste Asset Management

Stagflation – a serious risk scenario

Stagflation – a serious risk scenario
Stagflation – a serious risk scenario
(c) christine-roy-unsplash
Share post:

The global economic recovery is still underway despite strong turbulence. How long will it last?

In recent months, the risk of stagflation (the simultaneous occurrence of economic stagnation and inflation) has increased. Without the pandemic, output would be higher and inflation lower: bottlenecks in production and logistics have slowed economic activity and caused prices in the goods sector to rise sharply.

In addition, the sharp rise in energy prices has reduced consumers’ purchasing power. There were also bottlenecks on the labor market: The shift in consumption has shifted the need for labor from one sector to another, thus increasing unemployment, as workers cannot be replaced as easily.

In cyclical terms: no stagflation

The post-Covid recovery threatens to be short-lived, while inflation remains high in the long run. Are we now facing stagflation? If the phase of bottleneck-induced high inflation rates lasts longer than originally assumed, there is an increased risk that long-term inflation expectations will also rise: A so-called wage-price spiral would then be set in motion.

To prevent this negative scenario, more and more central banks are reducing the ultra-expansive monetary policy stance. The aim is to anchor inflation expectations firmly at the central bank’s inflation target. As a result central banks are raising key interest rates faster than expected toward an interest rate level that is neutral for the economy. As long as central banks remain successful in doing so, i.e. inflation expectations do not rise, the current above-average inflation rates will disappear as soon as the bottlenecks dissipate. Then the economic recovery toward full employment could also proceed more smoothly.

The risk of immediate stagflation has increased, but is still manageable. In the long term, however, structural inflation risks have increased for two reasons: Deflationary forces are diminishing and inflationary forces are increasing

Deflationary forces are disappearing

Over the past 25 years, inflation rates have fallen significantly for two main reasons: globalization, especially the opening of China, and the growing working-age population. However, these two effects are increasingly weakening.

In more and more countries, the working-age population is shrinking. Many countries are trying to compensate for this trend by increasing the labor force participation rate. However, this is not succeeding everywhere: in the USA, for example, the labor force participation rate is on a downward trend. Higher productivity growth could theoretically also offset the effect of the proportionally shrinking working-age population.

But in fact, productivity growth has been declining for years, despite technological advances in digitization. Less work means a more difficult bargaining position for employees and ultimately pressure on the wage-price spiral. It is not only demographic developments that could lead to higher inflation. Several studies point to the stagflationary influence of climate change: without climate change, production and the price level would also be lower.

Inflationary forces on the rise

On the monetary and fiscal policy side, the pattern of thinking and behavior has changed. With inflation rates in many cases below the central bank’s respective target over the past 10 years, monetary policy has remained looser for longer overall compared to the past.

On the fiscal side, there are indications that the current phase of high budget deficits will not be followed by austerity: The recovery phase should not be jeopardized. Central banks and finance ministries are called upon not to tighten the reins too quickly, but not too slowly either. Switching to a restrictive course too soon would lead to a low-growth environment. However, if full employment is eventually reached and policymakers are too slow in withdrawing the expansionary course, there is a risk of the economy overheating. Inflation would then rise. But how would central banks respond?

Conflicting objectives

Central banks are explicitly or implicitly confronted with several objectives: Keeping inflation at a low level in the medium term and achieving full employment, not jeopardizing financial stability and public debt dynamics (by raising interest rates sharply), and supporting the fight against climate change.

What would be the answer to possible trade-offs? Key interest rates could be raised too little so as not to jeopardize financial stability and public debt dynamics. Inflation could then get out of hand, and ultimately the central bank would react too late to inflation and stifle economic growth with the necessary rate hikes. This scenario could lead to a structural stagflationary environment.


The pandemic has led to higher-than-expected inflation expectations. In the most likely scenario, this is a temporary phenomenon: however, an inflation problem is a serious risk scenario in the medium term.

Important legal information:

Forecasts are not a reliable indicator of future performance.


Legal disclaimer

This document is an advertisement. Unless indicated otherwise, source: Erste Asset Management GmbH. The language of communication of the sales offices is German and the languages of communication of the Management Company also include English.

The prospectus for UCITS funds (including any amendments) is prepared and published in accordance with the provisions of the InvFG 2011 as amended. Information for Investors pursuant to § 21 AIFMG is prepared for the alternative investment funds (AIF) administered by Erste Asset Management GmbH pursuant to the provisions of the AIFMG in conjunction with the InvFG 2011.

The currently valid versions of the prospectus, the Information for Investors pursuant to § 21 AIFMG, and the key information document can be found on the website under “Mandatory publications” and can be obtained free of charge by interested investors at the offices of the Management Company and at the offices of the depositary bank. The exact date of the most recent publication of the prospectus, the languages in which the key information document is available, and any other locations where the documents can be obtained are indicated on the website A summary of the investor rights is available in German and English on the website and can also be obtained from the Management Company.

The Management Company can decide to suspend the provisions it has taken for the sale of unit certificates in other countries in accordance with the regulatory requirements.

Note: You are about to purchase a product that may be difficult to understand. We recommend that you read the indicated fund documents before making an investment decision. In addition to the locations listed above, you can obtain these documents free of charge at the offices of the referring Sparkassen bank and the offices of Erste Bank der oesterreichischen Sparkassen AG. You can also access these documents electronically at

N.B.: The performance scenarios listed in the key information document are based on a calculation method that is specified in an EU regulation. The future market development cannot be accurately predicted. The depicted performance scenarios merely present potential earnings, but are based on the earnings in the recent past. The actual earnings may be lower than indicated. Our analyses and conclusions are general in nature and do not take into account the individual characteristics of our investors in terms of earnings, taxation, experience and knowledge, investment objective, financial position, capacity for loss, and risk tolerance.

Please note: Past performance is not a reliable indicator of the future performance of a fund. Investments in securities entail risks in addition to the opportunities presented here. The value of units and their earnings can rise and fall. Changes in exchange rates can also have a positive or negative effect on the value of an investment. For this reason, you may receive less than your originally invested amount when you redeem your units. Persons who are interested in purchasing units in investment funds are advised to read the current fund prospectus(es) and the Information for Investors pursuant to § 21 AIFMG, especially the risk notices they contain, before making an investment decision. If the fund currency is different than the investor’s home currency, changes in the relevant exchange rate can positively or negatively influence the value of the investment and the amount of the costs associated with the fund in the home currency.

We are not permitted to directly or indirectly offer, sell, transfer, or deliver this financial product to natural or legal persons whose place of residence or domicile is located in a country where this is legally prohibited. In this case, we may not provide any product information, either.

Please consult the corresponding information in the fund prospectus and the Information for Investors pursuant to § 21 AIFMG for restrictions on the sale of the fund to American or Russian citizens.

It is expressly noted that this communication does not provide any investment recommendations, but only expresses our current market assessment. Thus, this communication is not a substitute for investment advice, does not take into account the legal regulations aimed at promoting the independence of financial analyses, and is not subject to a prohibition on trading following the distribution of financial analyses.

This document does not represent a sales activity of the Management Company and therefore may not be construed as an offer for the purchase or sale of financial or investment instruments.

Erste Asset Management GmbH is affiliated with the referring Sparkassen banks and Erste Bank.

Please also read the “Information about us and our securities services” published by your bank.

Subject to misprints and errors.

Leave a comment Required fields are marked with *

Your email address will not be published. Required fields are marked *