Infographics

A Visual Guide to Stagflation, Inflation, and Deflation

Published

2 months ago

September 30, 2022

Dorothy Neufeld

This infographic is available as a poster.

Stagflation

This infographic is available as a poster.

A Visual Guide to Stagflation, Inflation, and Deflation

Today, high inflation and slowing economic growth have contributed to stagflation worries.

As of August 2022, the U.S. inflation rate has risen to 8.3%, above the central bank target of 2%. Yet unlike the last period of stagflation in the 1970s, unemployment—a key ingredient for stagflation—remains low.

In this infographic from New York Life Investments, we show the key differences between stagflation, inflation, and deflation along with the broader economic implications of each.

Main Features of Inflationary Environments

What are the main characteristics of each inflationary scenario?

	Economic Growth	Inflation	Unemployment
Stagflation	Slows	Increases	Increases
Inflation	Increases	Increases	Decreases
Deflation	Slows	Decreases	Increases

The key markers of stagflation are weak growth, persistent inflation, and structural unemployment—meaning that high unemployment levels continue beyond a recession.

In a stagflationary scenario, inflation expectations continue to rise each year. This can happen when inflation stays too high for too long, enough for expectations to shift across the economy. This was the case in the U.S. in the 1970s, until the Federal Reserve fought inflation with steep interest rate hikes.

Here’s a closer look at some of the main causes of each scenario and how they’ve historically impacted households and businesses.

1. Stagflation

The term stagflation is the combination of ‘stagnation’ and ‘inflation’.

The primary causes include the expansion of the money supply feeding into higher inflation, as well as supply shocks, which can drag on economic growth.

During periods of stagflation, consumers spend more on items such as food and clothing, while earning less—reducing their purchasing power. Less purchasing power can eventually cause people to buy less, leading to falling corporate revenues, which can ripple across the economy.

Case Study: 1970s Stagflation

The stagflation of the 1970s saw inflation, as measured by the Consumer Price Index, increase from 1% to 14% between 1964 and 1980.

Price pressures, driven by skyrocketing energy prices in the 1970s, contributed to a sharp economic downturn. By 1980, unemployment reached 7.2%.

Year	Annual Inflation Rate	Unemployment Rate (December)	Annual GDP Growth
1964	1.3%	5.0%	5.8%
1980	13.5%	7.2%	-0.3%

In response, the Federal Reserve raised interest rates as high as 20% in 1981. Soon after, inflation sank to 5% by 1982 and unemployment levels improved.

2. Inflation

Inflation is the rise in the price of goods and services across the economy. Broadly speaking, low and stable inflation is associated with periods of economic growth and low unemployment. It can be driven by rising consumer demand.

The expectation of predictable inflation allows consumers and businesses to prepare for the future, in terms of both their purchases and investments.

Case Study: 1990s-2000s

Over the 1990s and 2000s, the U.S. saw relatively low and stable inflation.

Rapid global population growth, the absence of oil shocks, and expanding global trade contributed to falling costs across industries. Between 1990 and 2007, inflation averaged 2.1% compared to 8.0% during the 1970s as price pressures became less volatile.

Year	Annual Inflation Rate	Unemployment Rate (December)	Annual GDP Growth
1990	5.4%	6.3%	1.9%
2007	2.9%	5.0%	2.0%

Today, several central banks adhere to a 2% inflation target to ensure prices remain stable and predictable.

3. Deflation

Deflation is the fall in prices of goods and services in the economy.

In many cases, its main causes are demand shortfalls, reduced output, or an excess of supply. For households, spending may stall as consumers wait for prices to fall. In turn, declining prices may lead to a lag in growth for businesses.

Sometimes, deflationary periods raise concerns of slower economic growth. However, supply-driven deflationary periods may be associated with lower prices, raising real incomes and boosting output as exports become more competitive.

Case Study: 1930s Great Depression

Prior to WWII, deflationary episodes were more common than today. One prime example is the Great Depression of the 1930s, when real GDP fell 30% between 1929 and 1933 and unemployment spiked to 25%.

Year	Annual Inflation Rate	Unemployment Rate (December)	Annual GDP Growth
1930	-2.7%	8.7%	-8.5%
1933	-5.2%	24.9%	-1.2%

Tightening monetary policy contributed to this environment. In fact, between 1930 and 1933, the U.S. money supply contracted roughly 30%, while average prices fell by a similar amount.

Historical Asset Class Performance

Which asset classes have historically tended to perform well across different types of inflationary environments?

Average Real Annual Total Returns (1973-2021)	Goldilocks	Disinflation	Reflation	Stagflation
U.S. Equities	16.1%	8.4%	14.6%	-1.5%
U.S. Treasuries	4.3%	8.1%	-2.0%	0.6%
U.S. T-Bills	0.8%	1.7%	0.0%	0.4%
Commodities	0.4%	-5.6%	21.0%	15.0%
Gold	-2.5%	1.3%	-1.1%	22.1%
REITs	18.1%	3.5%	14.0%	6.5%

Defensive assets like gold and commodities have historically performed well during stagflationary periods, with average returns of 22.1% and 15.0%, respectively.

Meanwhile, U.S. equities have typically performed well during moderate inflation, or ‘goldilocks’ environments, characterized by falling inflation and rising economic growth.

Both U.S. equities and Treasuries have shown the strongest real returns in deflationary or ‘disinflationary’ periods of slowing growth and inflation, at over 8% returns on average each.

Understanding Different Inflationary Environments

Today’s inflationary period is jarring for investors after an extended period of low and stable inflation. With this in mind, the economy has historically cycled through different types of inflationary periods.

While central banks aim to influence price stability and employment through monetary policy, investors can influence their portfolio by adjusting their asset allocation based on where the inflationary environment may be heading.

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5 Key Questions Investors Have About Inflationary Environments

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Infographics

5 Key Questions Investors Have About Inflationary Environments

This infographic explores questions on today’s inflationary environment as the economy faces persistent price pressures.

Published

1 month ago

October 27, 2022

Dorothy Neufeld

This infographic is available as a poster.

5 Key Questions on Inflationary Environments

What does a changing inflationary environment mean for financial markets, and how could this impact investors?

While there are no clear answers, the above infographic from New York Life Investments looks at key questions on inflation and the potential implications looking ahead.

1. What Are the Main Factors Driving Inflation?

Often, investors closely watch core inflation since it doesn’t factor in volatile energy and food prices. In September, core inflation rose 0.6% from the previous month while headline inflation, as represented by the Consumer Price Index, increased 0.4%.

Date	Core Inflation	Headline Inflation
Sep 2022	0.6%	0.4%
Aug 2022	0.6%	0.1%
Jul 2022	0.3%	0.0%
Jun 2022	0.7%	1.3%
May 2022	0.6%	1.0%
Apr 2022	0.6%	0.3%
Mar 2022	0.3%	1.2%

Source: Bureau of Labor Statistics, 10/13/22.

Earlier in the pandemic, surging second-hand car prices and supply-chain distortions were factors driving up inflation. But as dynamics have shifted, rising services costs, including housing, have played a significant role.

Along with these factors, a strong labor market is adding to price pressures. Nominal wages increased 6.3% annually in September, after hitting almost 7% in August, the highest in 20 years.

For this trend to reverse, unemployment levels may need to rise and interest rates may need to increase to cool an overheating economy.

2. What is the Effect of Fiscal Stimulus on Inflation?

In response to a historic crisis, the U.S. government allocated over $5 trillion in fiscal stimulus. The Federal Reserve released research that suggests that the fiscal stimulus contributed to 2.5 percentage points in excess U.S. inflation.

Specifically, the fiscal stimulus affected supply and demand dynamics, stimulating the consumption of goods. At the same time, the production of goods didn’t increase, which elevated demand pressures and price tensions.

As the short-term implications begin to unfold, the longer-term structural effects of record stimulus remain far from clear.

3. How Do Interest Rates Impact Inflation?

When inflation is running high, the Fed often hikes interest rates to cool an overheating economy.

Consider how in February 1975 there was a 17% difference between core inflation and real interest rates, an instance when the Fed got “behind the curve”. This shows that the real rate is far below the core inflation rate.

Sometimes, this prompts the Fed to raise rates to combat inflation. After several rate hikes, inflation fell to 4% by 1983, bringing the real rate and core inflation closer together. The table below shows when this gap rose to the double-digits between 1974 and early 2022:

Date	Core Inflation	Real Rate	Difference
Oct 1974	10.6%	-0.5%	11.1%
Nov 1974	11.0%	-1.5%	12.5%
Dec 1974	11.3%	-2.8%	14.1%
Jan 1075	11.5%	-4.4%	15.9%
Feb 1975	11.9%	-5.6%	17.5%
Mar 1975	11.3%	-5.8%	17.1%
Apr 1975	11.3%	-5.8%	17.1%
May 1975	10.3%	-5.1%	15.4%
Jun 1975	9.8%	-4.3%	14.1%
Jul 1975	9.1%	-3.0%	12.1%
Jan 1980	12.0%	1.9%	10.2%
May 1980	13.1%	-2.2%	15.3%
Jun 1980	13.6%	-4.1%	17.7%
Jul 1980	12.4%	-3.4%	15.8%
Aug 1980	11.8%	-2.2%	14.0%
Sep 1980	12.0%	-1.1%	13.1%
Oct 1980	12.2%	0.7%	11.6%
Dec 2021	5.5%	-5.4%	10.9%
Jan 2022	6.0%	-6.0%	12.0%

Source: Peterson Institute for International Economics, Federal Reserve Bank of St. Louis, 03/14/22. The real policy interest rate is the Federal Funds Rate minus Core Inflation over 12 months.

In January 2022, this gap reached 12%, hinting towards further interest rate action from the Fed.

Over the last 11 tightening cycles since 1965, six resulted in soft landings and three resulted in hard landings. Whether or not the recent tightening cycle will result in a hard landing, also known as a significant decline in real GDP, remains an open question.

4. How Long Will Inflation Last?

From the vantage point of 2022, the direction of inflation is as complex as it is uncertain. Below, we show where inflation may be headed in the near future based on analysis from the Federal Reserve.

	2022P	2023P	2024P
PCE Inflation	5.4%	2.8%	2.3%
Federal Funds Rate	4.4%	4.6%	3.9%

Source: Federal Reserve Board, 09/21/22. Reflects median projections for PCE Inflation and the Federal Funds Rate.

By 2024, inflation is expected to fall closer to the 2.0% target amid higher interest rates. What other key factors could influence inflation going forward?

	2023 Projection
U.S. Real GDP Growth	1.2%
Interest Rates	4.6%
Housing Price Growth	-10.0%
Unemployment Rate	4.4%

Source: Federal Reserve Board 09/21/22, Morningstar, 08/07/22. Interest rates represented by the Federal Funds Rate. Housing Price Growth represented by median U.S. home prices.

A combination of slowing GDP growth, higher interest rates, decreasing housing prices, and higher unemployment could potentially dampen inflation leading into 2023.

5. What May Lessen the Impact of Inflation On My Portfolio?

During inflationary periods, value stocks have tended to perform well, based on data from Robert Shiller and Kenneth French. In fact, value stocks saw nearly 8% annualized outperformance over growth during the 1970s and over 5% outperformance during the 1980s.

Similarly, tangible assets like commodities and real estate have tended to weather these periods thanks to their ability to increase portfolio diversification and stability across economic cycles. For instance, between 1973 and 2021, commodities have averaged 19.1% during inflationary periods while real estate assets averaged 5.0%.

The Big Canvas

Generally speaking, periods of high inflation over history are quite rare. Since 1947, the average U.S. inflation rate has been 3.4%.

Inflation (1947-2021)	Percentage of Time Spent
Below 0%	16%
Between 0 and 5%	57%
Between 5 and 10%	20%
Above 10%	7%

Source: CFA Institute, 07/19/21.

Against a changing environment, investors may consider balancing their portfolios with more defensive strategies that have been historically more resistant to inflation.

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Infographics

A Visual Guide to Navigating Down Markets

This infographic looks at the key fundamentals and market sectors that have been historically resilient during down markets.

Published

3 months ago

September 9, 2022

Dorothy Neufeld

This infographic is available as a poster.

A Visual Guide to Navigating Down Markets

Today, markets are facing headwinds due to the impact of capital misallocation to overpriced securities over the last decade. High inflation and rising interest rates have highlighted this misallocation.

Amid market uncertainty, the above infographic from New York Life Investments provides investors with insights to prepare for down markets and shifting economic conditions.

Market Valuations in Context

To start, let’s look at market valuations.

Roughly a year before the market began to turn, the price-to-earnings (P/E) ratio of the S&P 500 Index reached 38 in late 2020—nearly double its 10-year average of 20.3. The P/E ratio is a common valuation measure for equities. This metric shows investors how much they would pay for $1 of earnings.

This suggests that stocks were pricier than long-term averages, hitting steep valuations unhinged from their underlying fundamentals. Ultra-low interest rates likely bolstered valuations, encouraging investors to invest their money in equities versus cash or government bonds, which were at historic lows.

	2020	2021	2022*
U.S. Interest Rate Change	-250 bps	0 bps	225 bps
Average Annual CPI Percent Change	1.2%	4.7%	8.6%

*Data as of Q1 2022

As interest rates increased and inflation rose higher, the P/E ratio of the S&P 500 Index fell to 20.8 in April 2022, closer to its longer-term average.

With this in mind, let’s look at the underlying fundamentals and key sectors that may position investors for strength amid a changing macroeconomic environment.

1. Focus on Fundamentals

When interest rates are rising and inflation is high, fundamentals relating to cash flow become more important:

Earnings Growth
Dividends
Return on Invested Capital (ROIC)

ROIC is a profitability measure that shows how much a company earns on its invested capital, such as debt and equity.

Historically, improving fundamentals have been a leading indicator of sector performance over the intermediate-term. Along with this, S&P 500 Index dividends have surpassed inflation over the last two decades. In fact, between 2000 and 2021, dividends paid out increased from $140 billion to $512 billion, or about 3.7 times.

Not only that, dividends have historically been far less volatile than stocks. Since 1957, stock prices have been more than two times as volatile as their dividend cash flows.

2. Trouble Can Become Opportunity

Consumer sentiment is hovering near historical lows.

The good news is this may be a silver lining for the consumer discretionary sector, which has historically outperformed when sentiment sinks to this level.

Consumer discretionary stocks cover non-essential items such as restaurants, hotels, and automobiles.

Consumer Sentiment Index Level	Historical Odds of Consumer Discretionary Outperformance (12-Month)
< 55	100%
< 65	74%
< 75	76%
> 95	50%

Given historical patterns, the consumer discretionary sector may be poised to accelerate over the next 12 months.

3. Value in Favor

Given high inflation and interest rates on the rise, it may present an opportunity for a value investment approach.

Value stocks are considered underpriced compared to the broader market and are often inflation-sensitive. In the last year, value stocks have outperformed growth by over 20 percentage points.

On a sector-level, materials, financials, and communication services are valued below their average P/E ratio, along with the following sectors:

S&P 500 Sector	Forward 12-Month P/E Ratio	5-Year Average	Year-to-Date Earnings Growth
Materials	13.5	17.4	14.6%
Financials	12.1	13.3	-13.7%
Communication Services	15.1	17.7	-5.1%
Industrials	17.5	19.3	32.1%
Real Estate	19.0	19.1	13.6%

Source: FactSet, 08/05/22

Although the tech sector has seen declines in 2022, the sector’s P/E ratio (22.5) is above its 5-year average (21.7) with 9.8% earnings growth year-to-date.

Market Scenarios

With the S&P 500 Index experiencing its worst first half since 1970, let’s look at the different scenarios going forward into 2023.

The below table shows the worst case, base case, and best case scenarios for S&P 500 Index price returns during bear markets, based on data from 1953 to 2020.

Market Scenario	S&P 500 Index Cumulative Price Return During a Recession	Year
Worst Case	< -18%	2001
Base Case	16%	Average
Best Case	> 44%	2020

Historical data shows that on average, the S&P 500 Index has returned 16% one year after the start of a recession.

The following key factors will likely influence market developments:

Inflation
Consumer Spending
Unemployment Levels
Interest Rates
Corporate Earnings Growth

So far, the S&P 500 Index has recovered 7% from its June lows as of early September. A similar trend is seen in the NASDAQ Composite Index—an index significantly weighted in tech stocks— which has recovered 8% over roughly the same time frame.

Keeping a Clear Focus During Down Markets

As investors navigate down markets, rebalancing to suit their risk profile can be an important part of the process.

It is also important to remember that markets are cyclical. For this reason, staying invested, diversified, and disciplined are critical for keeping long-term strategic goals in mind.

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