Inflation and Stagnation

by | Oct 4, 2023

Part 2 of a 5-part Series: What Have Past Inflation Crises Taught Us About Investing? 

By James Pearcy-Caldwell, Aisa Co-Founder and Compliance Officer, and Chris Lean, Chief Investment Officer 

This series of articles is based on key factors currently affecting most economies, but not all. It has an immediate relationship with investments. It also discusses historic data from previous inflation bubbles and their outcomes.

Key factors discussed include:
• Inflation
• Stagflation
• Economic Bubbles
• Market reaction in previous stagflation / recessionary times

Inflation and Stagnation

Inflation and stagnation are difficult-to-handle economic cycles. A general definition of Inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation corresponds to a reduction in the purchasing power of money.  

Most western economies seek to keep inflation low and then hope to achieve growth in excess of the inflation. It is controlled by money supply, supply and demand, currency exchange and interest rates. 

These areas can stoke inflation or reduce inflation. For example, interest rates which have become the focus in 2023 in most countries, can be raised to reduce desire to borrow and spend. As borrowing becomes more expensive, people, and companies, have less money to spend. Therefore, they look to become more efficient, reduce borrowing, or reduce spending.  

More firms suffer debt-service stress  

For individuals and companies that are well financed or have little or no borrowing or fixed interest debt, there can be less of an impact on them than individuals or companies that do not have these properties. For example, companies that are well financed can “weather the storm”, whilst for companies with large borrowings or limited profit can go bankrupt.  

Inflation and stagflation analyses.The Bank of England released research confirming what has been obvious for some time. Specifically, that higher interest rates are causing corporate distress. The table on the left shows projected corporate distress.  

This is also true of the average individual, a wage earner or particularly a retiree who watches debts and costs increase whilst their income cannot keep up.  

However, there is some good news. The factors that drove inflation have been reversed. Supply-side pressures owing to the pandemic and war have gone and monetary policy has tightened. Thus, inflation will decelerate and boost spending power as real incomes rise.  


For those with large borrowing or limited margin on spending power, inflation can have a disproportionate effect on them.

Other organizations can weather inflationary times. For example, many “new world” companies do not turn a profit, they rely on their investors to keep them operating. For firms with low debts, or fixed debts, and have been in profit, they are more likely to survive high inflation. Although, this is not guaranteed.  

Two tier ecomonies

Whilst inflation can lead to interest rate increases it should lead to reduced spending power, thus limiting purchases. Firms therefore raise prices until they cannot raise them anymore as people stop spending. In fact, the basic rule of economics says that prices shouldn’t go up when people have less money to spend, or their jobs are at risk.  

One of the assessments for inflation is flights. Many countries have seen escalating airline prices, and, despite this, demand has increased and is back to pre-COVID levels. However, this is happening at the same time as people have less money.  

Different reasons are given as to why this is happening in 2022 and 2023. Most of them point to a “two tier economy”. Here, there is a release of savings after COVID combined with western government borrowing increasing over the last 10 years at rates not seen for over 60 years. Additionally, governments printing cash, again not seen for almost 100 years. And, finally, government propping up firms and individuals at any sign of crisis.  

What is meant by a “two tier economy” in this context is that people with savings or money are able to continue their lifestyles, whilst others without savings or lower earnings are being disproportionally impacted. The spending of the first group keeps inflation and interest rates higher for longer until they too are impacted.  

However, there will come a point where this growth slows dramatically due to the rise in inflation and interest rates. Companies and individuals with large borrowing will start to struggle, perhaps become bankrupt, which will lead to efficiency drives. Efficiency drives lead to cuts in expenses, and this often leads to cuts in staff, which means unemployment goes up.  


Stagflation is an economic cycle characterized by slow growth and a higher unemployment rate accompanied by inflation. Economic policymakers find this combination particularly difficult to handle, as attempting to correct one of the factors can exacerbate another.  

Policy solutions for slow growth tend to worsen inflation, and vice versa. That makes stagflation hard to fight for governments. Already, you can see some governments taking different measures.  

Theories about stagflation:  

  • Supply side shocks – These are unexpected events, such as a disruption in the oil supply or a shortage of essential parts. During the COVID-19 pandemic there was a disruption of the flow of semiconductors. This slowed the production of everything from laptops to cars and appliances all the way thorough 2022 and early 2023.
  • Oil and energy costs increase – This considers that stagflation is caused when a sudden increase in the cost of oil reduces an economy’s productive capacity.
  • Economic Policy – This suggests that the confluence of stagnation and inflation is the result of poorly made economic policy. Harsh regulation of markets, goods, and labour in an otherwise inflationary environment are cited as the possible cause of stagflation.

Are we in stagflation yet in the western world? 

The absence of a slowdown in spending overall, and relatively low unemployment in the UK would suggest that stagflation has not happened yet. However, many other European economies show clear signs of stagflation although inflation does appear to have peaked. The concern is the methods used by some governments to control inflation. These include state legislated control of private company prices, or more government borrowing to subsidise. They could just be delaying the inevitable with these short-term policies.

In the US they are borrowing money and subsidising targeted business in order to promote growth. However, with the US debt ration being at over 130%, this is a risky strategy (U.S. Debt to GDP Ratio 1989-2023 | MacroTrends). It could yet lead to a recession (some economists predict this) which could lead to stagflation. The jury is out on the various deployed methods of different governments around the world as to which will be the most successful and we may not know for a couple of years.  

In the UK, we know what is needed to boost investment and improve growth potential: 

  • Sound macroeconomic policy on the level 
  • Predictability and simplicity of tax 
  • Sufficient finance for companies, including small and medium-sized ones 
  • A skilled labour force 
  • Supportive and functioning infrastructure 
  • A lack of bureaucracy or risk-averse regulation, and 
  • Future expected demand 

See Also:

Inflation in 2022 and 2023 and What the Past Has Taught Us

Economic Bubbles

Aisa International, s.r.o. is a wealth management firm with an award-winning team providing investment advice, financial planning, and asset management for U.S., U.K., and E.U. expatriate citizens residing abroad. Aisa International holds all current regulatory licenses, including the FCA license in the UK and the Investment License in the European Union. Therefore, Aisa International is uniquely qualified to provide personal financial advice for U.K. pensioners living outside of the U.K. Aisa International serves its global clients where they reside through its OpesFidelio network of highly-qualified advisors. For more information, please visit  

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The views expressed in this article are not to be construed as personal advice. Therefore, you should contact a qualified, and ideally, regulated adviser in order to obtain up-to-date personal advice with regard to your own personal circumstances. Consequently, if you do not, then you are acting under your own authority and deemed “execution only”. The author does not accept any liability for people acting without personalised advice, who base a decision on views expressed in this generic article. Importantly, where this article is dated then it is based on legislation as of the date. Legislation changes but articles are rarely updated, although sometimes a new article is written; so, please check for later articles or changes in legislation on official government websites, as this article should not be relied on in isolation.

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Post written by:

James Pearcy-Caldwell

James founded and runs Aisa with an emphasis on a pro-client and transparent approach. He is always looking for the most suitable solution for the benefit of the client. He has been in the field of investment advice since 1998, and therefore fully understands the necessity of open communication and honesty. James is certified in many financial areas in several countries and also holds the most prestigious European certificate in investment planning EFP (European Financial Planner).

Aisa International is the only financial advice service company specialising in advice for expats that is regulated as a Securities Trader in the Czech Republic, USA, and UK.