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Stagflation. Is it a Real Worry?

The North American stock markets levelled out during the month of October after a tumultuous September as investors digested several pivots over the last month. Amid persistent inflation, Central Banks across the globe have started to lean towards tightening monetary policy earlier than previously expected. This is coinciding with softer GDP growth prints after economic growth peaked during the second quarter of 2021. A slow growing GDP put together with persistent high inflation has flamed worries of ‘Stagflation’ in the minds of investors and many economists alike. Google Trends shows that interest in the word “Stagflation” spiked during the month of October. (see Chart 1).


Stagflation is a period when economic growth stagnates while inflation is high. It is considered a period of unease because stagnant economic growth leads to rise in unemployment while high inflation simultaneously leads to loss of purchasing power.


While it is prudent to monitor the concerns on investors minds, it is important to note that the current conditions do not meet the definition of stagflation. There is currently a labour shortage while jobs are plentiful, leaving the unemployment outlook set to continue to decline from current levels. Supply-chain bottlenecks amid robust demand explain part of the high inflation. This suggests that inflation should cool off from current levels as these bottlenecks are taken care off. Further, the weaning off the economy from the sugar high of stimulus packages isn’t equivalent of economic stagnation.


Chart 1. Interest in the word “Stagflation” spiked during October 2021

Stagflation worldwide

Source: Google Trends

Note: Numbers represent search interest relative to the highest point on the chart for the given region and time. A value of 100 is the peak popularity for the term. A value of 50 means that the term is half as popular. A score of 0 means there was not enough data for this term.


October in Review

  1. The North American stock markets roared back after a tumultuous September with S&P 500 advancing by ~6.9% and S&P TSX by ~4.8% during the month.

  2. The Bank of Canada announced termination of its bond buying program and signaled a potential lift off in interest rates starting in the middle quarters of 2022. The US Federal reserve is due to release its monetary policy statement on 3rd November 2021 and is widely expected to announce commencement of tapering of its bond buying program.

  3. During the month, bond yields witnessed a sharp increase on both sides of border amid bets of tightening of monetary policy

  4. For the month of September (released in October), the inflation number was at 5.4% for the US (as per Bureau of Labor Statistics) and 4.4% for Canada (as per Statistics Canada).

  5. The Canada GDP grew at ~0.4% in August (as per as per Statistics Canada) vs. expected ~0.7% and US GDP grew at ~2.0% in the third quarter (as per Bureau of Economic Analysis) vs. expected ~2.6%.

  6. According to Bloomberg’s survey of economists, the GDP growth forecasts for 2021 for the US came down from 6.6% in June to 5.7% in October. The corresponding figures for Canada stood at 6.2% in June and 5.0% in October.

  7. As per Bloomberg data, during the third-quarter earnings season so far, about 82% of companies in S&P 500 index and ~ 60% of the companies in the S&P TSX index have reported better-than-expected earnings.

How does this affect my investments?


The stock markets are inherently volatile and short-term market movements are impossible to predict. Historically, market declines have been followed by recoveries and new highs. By staying invested in a diversified portfolio, your portfolio will be well positioned to benefit from a recovery while mitigating the volatility experienced during the period.

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