- Stagflation occurs when inflation is high and economic growth is slow.
- Dave Ramsey explained that we may be experiencing stagflation right now.
- Ramsey offered some tips to deal with stagflation if it occurs.
This is one economic term everybody needs to know.
If you've watched or read any financial news lately, chances are good you have heard the term "stagflation" used in recent weeks or months. But what exactly is stagflation?
Personal finance expert Dave Ramsey has explained stagflation as "an economic term that describes when economic growth is slow or negative and inflation and unemployment are high." His explanation, while simple, is spot on. Stagflation essentially refers to a stagnant economy with slow or negative growth combined with a period of high inflation when prices are high.
Ramsey explained the meaning of stagflation in a recent post on the Ramsey Solutions blog not just to provide financial education but because there is reason to suspect that we are experiencing this phenomenon in the U.S. now or will be soon.
Here's what this could mean for you.
Does Dave Ramsey think we are experiencing stagflation?
When addressing the question of whether we are currently in a period of stagflation, Ramsey said, "The answer is maybe, but it’s still a little too early to know for sure."
However, he also pointed to some key indicators to suggest that this undesirable economic condition is currently a way of life in the United States or will be one soon.
The U.S. experienced negative economic growth in the first quarter of 2022 and could see the same for the second quarter when the numbers are released in July. Since two back-to-back quarters of negative growth are often defined as a recession, and since we are currently experiencing inflation at a 40-year high, this is basically the definition of stagflation.
Should you be concerned?
If you are concerned about stagflation, or what it could mean for you, Ramsey advises not wasting your energy on worry. "There are a lot of things that are out of your control. You can’t control inflation. You can’t control gas prices. And you can’t control whether or not stagflation is going to happen."
However, that doesn't mean he believes you should do nothing to be ready for it. "In the middle of all these things you can’t control, you can find peace by taking control of your finances," he urged.
Ramsey provided some tips on getting into a financial position to prepare for possible stagflation, including avoiding panic and completing the "7 baby steps" that are the foundation of all his financial advice. These steps are:
- Saving up a starter emergency fund
- Repaying all non-mortgage debt
- Building an emergency fund with three to six months of living expenses
- Saving for retirement
- Saving for college
- Repaying your mortgage early
- Building wealth and engaging in charitable giving
Outside of these steps, which he recommends everyone do regardless of how the economy is going, Ramsey also urges making adjustments to your budget to reflect today's high prices, exploring other ways to save, and trying to stay ahead of inflation by investing wisely.
Is Ramsey right?
Ramsey's advice is excellent on this issue. The reality is, we may be experiencing stagflation already and even if we aren't, many people are still struggling because inflation is so high. Taking steps to become more financially prepared is important during these challenging times.
While this may not necessarily mean you need to follow every baby step in order (early mortgage payoff may not make sense, for example), saving more and paying down debt could put you in a better position to cope with an economic downturn and high prices.
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