Infographics

A Visual Guide to Stagflation, Inflation, and Deflation

Published

2 years 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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Infographics

The 20 Most Common Investment Mistakes, in One Chart

Here are the top investment mistakes to avoid, from emotionally driven investing to paying too much in fees.

Published

5 months ago

November 7, 2023

Dorothy Neufeld

The 20 Most Common Investment Mistakes

No one is immune to errors, including the best investors in the world.

Fortunately, investment mistakes can provide valuable lessons over time, providing investors an opportunity to gain insights on investing—and build more resilient portfolios.

This graphic shows the top 20 mistakes to watch out for, according to the CFA Institute.

20 Investment Mistakes to Avoid

From emotionally driven investment decisions to paying too much on fees, here are some mistakes that investors commonly make:

Top 20 Mistakes	Description
1. Expecting Too Much	Having reasonable return expectations helps investors keep a long-term view without reacting emotionally.
2. No Investment Goals	Often investors focus on short-term returns or the latest investment craze instead of their long-term investment goals.
3. Not Diversifying	Diversifying prevents a single stock from drastically impacting the value of your portfolio.
4. Focusing on the Short Term	It’s easy to focus on the short term, but this can make investors second-guess their original strategy and make careless decisions.
5. Buying High and Selling Low	Investor behavior during market swings often hinders overall performance.
6. Trading Too Much	One study shows that the most active traders underperformed the U.S. stock market by 6.5% on average annually. Source: The Journal of Finance
7. Paying Too Much in Fees	Fees can meaningfully impact your overall investment performance, especially over the long run.
8. Focusing Too Much on Taxes	While tax-loss harvesting can boost returns, making a decision solely based on its tax consequences may not always be merited.
9. Not Reviewing Investments Regularly	Review your portfolio quarterly or annually to make sure you’re staying on track or if your portfolio is in need of rebalancing.
10. Misunderstanding Risk	Too much risk can take you out of your comfort zone, but too little risk may result in lower returns that do not reach your financial goals. Recognize the right balance for your personal situation.
11. Not Knowing Your Performance	Often, investors don’t actually know the performance of their investments. Review your returns to track if you are meeting your investment goals factoring in fees and inflation.
12. Reacting to the Media	Negative news in the short-term can trigger fear, but remember to focus on the long run.
13. Forgetting About Inflation	Historically, inflation has averaged 4% annually. Value of $100 at 4% Annual Inflation After 1 Year: $96 After 20 Years: $44
14. Trying to Time the Market	Market timing is extremely hard. Staying in the market can generate much higher returns versus trying to time the market perfectly.
15. Not Doing Due Diligence	Check the credentials of your advisor through sites like BrokerCheck, which shows their employment history and complaints.
16. Working With the Wrong Advisor	Taking the time to find the right advisor is worth it. Vet your advisor carefully to ensure your goals are aligned.
17. Investing With Emotions	Although it can be challenging, remember to stay rational during market fluctuations.
18. Chasing Yield	High-yielding investments often carry the highest risk. Carefully assess your risk profile before investing in these types of assets.
19. Neglecting to Start	Consider two people investing $200 monthly assuming a 7% annual rate of return until the age of 65. If one person started at age 25, their end portfolio would be $520K, but if the other started at 35 it would total about $245K.
20. Not Controlling What You Can	While no one can predict the market, investors can control small contributions over time, which can have powerful outcomes.

For instance, not properly diversifying can expose you to higher risk. Holding one concentrated position can drastically impact the value of your portfolio when prices fluctuate.

In fact, one study shows that the optimal diversification for a large-cap portfolio is holding 15 stocks. In this way, it helps capture the highest possible return relative to risk. When it came to a small-cap portfolio, the number of stocks rose to 26 for optimal risk reduction.

It’s worth noting that one size does not fit all, and seeking financial advice can help you find the right balance based on your financial goals.

Another common mistake is trading too much. Since each trade can rake up fees, this can impact your overall portfolio performance. A separate study showed that the most active traders saw the worst returns, underperforming the U.S. stock market by 6.5% on average annually.

Finally, it’s important to carefully monitor your investments regularly as market conditions change, factoring in fees and inflation. This will let you know if your investments are on track, or if you need to adjust based on changing personal circumstances or other factors.

Controlling What You Can

To help avoid these mistakes, investors can remember to stay rational and focus on their long-term goals. Building a solid portfolio often involves assessing the following factors:

Financial goals
Current income
Spending habits
Market environment
Expected returns

With these factors in mind, investors can avoid focusing on short-term market swings, and control what they can. Making small investments over the long run can have powerful effects, with the potential to accumulate significant wealth simply by investing consistently over time.

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Infographics

Visual Guide: The Three Types of Economic Indicators

From GDP to interest rates, this infographic shows key economic indicators for navigating the massive U.S. economy.

Published

1 year ago

December 23, 2022

Dorothy Neufeld

View the high resolution version of this infographic. Buy the poster.

A Visual Guide to Economic Indicators

Economic indicators provide insight on the state of financial markets.

Each type of indicator offers data and economic measurements, helping us better understand their relationship to the business cycle. As investors navigate the market environment, it’s important to differentiate between the three main types of indicators:

Leading
Coincident
Lagging

The above infographic from New York Life Investments shows a road map of indicators and what they can tell us about the economy.

What’s Ahead: Leading Indicators

Leading indicators present economic data that point to the future direction of the economy like a sign up ahead. Here are three examples.

1. Consumer Confidence Index

This key measure indicates consumer spending and saving plans. When the index is above 100, consumers may spend more over the next year. In December, the index jumped to 108 up from 101 in November. This was in part due to lower inflation expectations and improving job prospects.

In the December survey, 48% indicated that the job market remained strong, highlighting the strength of employment opportunities and likely influencing sentiment towards spending in the future.

2. ISM Purchasing Managers Index

The ISM Purchasing Managers Index indicates expectations of new orders, costs, employment, and U.S. economic activity in the manufacturing sector. The following table shows how the index is broken down based on select measures:

Index	Nov 2022	Oct 2022	Percentage Point Change	Direction	Trend (Months)
Manufacturing PMI	49.0	50.2	-1.2	Contracting	1
New Orders	47.2	49.2	-2.0	Contracting	3
Employment	48.4	50.0	-1.6	Contracting	1
Prices	43.0	46.6	-3.6	Decreasing	2
Imports	46.6	50.8	-4.2	Contracting	1
Manufacturing Sector				Contracting	1

For instance, in November the index fell into its first month of contraction since May 2020. Falling new orders signal that demand has weakened while contracting employment figures indicate lower output across the sector.

3. S&P 500 Index

The S&P 500 Index indicates the economy’s direction since forward-looking performance is factored into prices. In this way, the S&P 500 Index can represent investor confidence as the index often serves as a proxy for U.S. equity markets. In 2022, returns for the index are roughly -20% year-to-date.

Current Conditions: Coincident Indicators

Coincident indicators reflect the current state of the economy, showing whether it is in a state of growth or contraction.

1. GDP

GDP indicates overall economic performance. Typically it serves as the most comprehensive gauge of the economy since it tracks output across all sectors. In the third quarter of 2022, real U.S. GDP increased 2.9% on an annual basis. That compares to 2.7% for the same period in 2021.

2. Personal Income

Rising incomes indicate a healthier economy and falling incomes signal slower growth. Personal income grew at record levels in 2021 to 7.4% annually amid a rapid economic expansion.

This year, U.S. personal income has grown at a slower pace, at 2.7% on an annual basis as of the third quarter.

3. Industrial Production Index

Strongly correlated to GDP, the industrial production index indicates manufacturing, utilities, and mining output. Below, we show trends in industrial production and how they correspond with GDP and personal income indicators.

Date	U.S. GDP	Personal Income	Industrial Production
2022*	7.3%	2.7%	4.7%
2021	10.7%	7.4%	4.9%
2020	-1.5%	6.7%	-7.0%
2019	4.1%	5.1%	-0.7%
2018	5.4%	5.0%	3.2%
2017	4.2%	4.6%	1.4%
2016	2.7%	2.6%	-2.0%
2015	3.7%	4.7%	-1.4%
2014	4.2%	5.5%	3.0%
2013	3.6%	1.3%	2.0%
2012	4.2%	5.1%	3.0%
2011	3.7%	5.9%	3.2%
2010	3.9%	4.3%	5.5%
2009	-2.0%	-3.2%	-11.4%
2008	2.0%	3.8%	-3.5%
2007	4.8%	5.6%	2.5%
2006	6.0%	7.5%	2.3%
2005	6.7%	5.6%	3.3%

*As of Q3 2022.

As the above table shows, factory production collapsed following the 2008 financial crisis, a key indicator for the depth of an economic downturn. Meanwhile, personal income sank over -3% while GDP fell -2%.

Despite economic uncertainty in 2022, industrial production remains positive, at a 4.7% growth rate, albeit somewhat slower than 2021 levels.

Rearview Mirror: Lagging Indicators

Like checking your back mirror, lagging indicators take place after a key economic event, often confirming what has taken place in the economy. Here are three key examples.

1. Interest Rates

Often, interest rates respond to changes in inflation. When rates rise it can slow economic growth and discourage borrowing. Rising interest rates typically signal a strong economy and are used to tame inflation. On the other hand, low interest rates promote economic growth.

Following years of record-low interest rates, the Federal Funds rate increased at the fastest rate in decades over 2022, jumping from 0.25% in March to 4.25% in December as inflation accelerated.

2. Consumer Price Index

This inflation measure can indicate cash flow for households. Inflation is often the result of rising input costs and increasing money supply across the economy.

Sometimes, inflation can reach a peak after an expansion has ended as rising demand in an economy has pushed up prices. In November, U.S. inflation reached 7.1% annually amid supply chain disruptions and price pressures across food prices, medical prices, and housing costs.

Year	Inflation Rate	Annual Change
2022*	7.1%	2.4%
2021	4.7%	3.5%
2020	1.2%	-0.6%
2019	1.8%	-0.6%
2018	2.4%	0.3%
2017	2.1%	0.9%
2016	1.3%	1.1%
2015	0.1%	-1.5%
2014	1.6%	0.2%
2013	1.5%	-0.6%
2012	2.1%	-1.1%
2011	3.2%	1.5%
2010	1.6%	2.0%
2009	-0.4%	-4.2%
2008	3.8%	1.0%
2007	2.9%	-0.4%
2006	3.2%	-0.2%
2005	3.4%	0.7%

*As of November 2022.

3. Unemployment Rate

The unemployment rate has many spillover effects, impacting consumer spending and in turn retail sales and GDP. Historically, unemployment falls slowly after an economic recovery which is why it’s considered a lagging indicator. When the unemployment rate rises it confirms lagging economic performance.

Overall, 2022 has been characterized by a strong job market, with unemployment levels below historical averages, at 3.7% as of October.

On the Road

To get a more comprehensive picture of the economy, combining a number of indicators is more effective than isolating a few variables. With these tools, investors can gain more perspective on the cyclical nature of the business cycle while keeping a long-term perspective in mind on the road ahead.

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