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Updated 2mo ago.
Updated 2mo ago.
Stagflation is a rare economic situation where high inflation coexists with stagnant economic growth and rising unemployment. It combines the worst of both worlds: prices keep rising while the economy fails to grow. This phenomenon is particularly difficult for central banks to combat.
Canada experienced stagflation in the 1970s when oil shocks drove up energy prices while the economy slowed. The Canadian inflation rate exceeded 10% in 1974 and 12% in 1981, while unemployment remained high. The Bank of Canada had to raise its key interest rate dramatically to break the inflationary cycle.
Understanding stagflation helps you avoid panicking when markets and the economy send contradictory signals. A well-diversified portfolio with some allocation to real assets (real estate, commodities) can weather these periods better than a portfolio that is 100% stocks or bonds.