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What is Stagflation?
Stagflation is a phenomenon that occurred during the '70s in the United States of America and caused great misery to the working class.
Stagflation is a combined word for inflation and stagnation used for the first time by Iain Macleod.
Stagflation is a combination of three undesirable economic situations, high inflation, high unemployment, and slow growth. That makes it very difficult to people to buy goods.
Causes of Stagflation
Many economic schools are offering their causes to Stagflation. We can narrow them all to two leading causes: Supply shock and Poor economic policies.
Covid 19 caused production and distribution disruptions almost globally. Unscheduled closure of manufacturing and distribution facilities, bottlenecks at borders, and sick workers have caused a domino effect, driving distribution prices to record highs.
Relatively small disruptions like the six-day blockade of the Suez Canal added to the already difficult situation.
While many Central banks globally increased money supply to tackle Covid-19, the interest rates remain low to help the economies sustain growth. That causes prices to climb and make the perfect cocktail for Stagflation.
As mentioned in our post about rising construction costs, Covid-19 is responsible for climbing property construction prices. On the other hand, Central Banks and Governments try to control the situation by offering low-interest rates and pumping newly printed money into the economies, driving inflation and prices too high. All this, if not controlled, will bring Stagflation in our lives.
There is no easy way out of Stagflation. To summarize all the economists' theories for a perfect solution, productivity and employment have to be increased to a point where it leads to higher growth without increasing inflation and prices.
Another way is to control other Stagflation ingredients, like raising interest rates which generally would drive the prices down, but in our case, the prices are climbing for many reasons, and inflation is just one of them.
This scenario of battling Stagflation will affect the property market in Cyprus immediately. Higher interest rates will prevent the majority of young families from buying property.
The Central Bank and Government already dropped the interest rates and introduced different schemes to help people buy. Rising the interest rates will be a step back from that approach.
To summarize, I would say that if the government fails to empower employment and productivity, we will experience some sort of Stagflation, and to get out of it, the Property Market will pay the price once again.
By Tasos Bilianides