S&W The Pulse

Soaring global energy prices have contributed to inflationary pressures, while economic growth has lost momentum. This has created fears of stagflation. This would be tough for stock markets, but is still only an outside possibility.  Stagflation happens when inflation pushes prices up faster than wages and profits, forcing consumers and businesses to cut back on expenditure. Demand drops and a downward spiral ensues. Previous periods of stagflation, such as those following the oil price shocks in the 1970s have been difficult for stock markets. US stocks performed particularly poorly during the 1973-1982 stagflation period, declining at an annualised rate of -1.5% after inflation, compared to 3.2% gains for the UK equity market. However, stagflation is not our central scenario. Strong GDP growth expectations means firms are expected to pass on some costs to consumers without materially affecting demand - so the trade-off between growth and inflation is still favourable for fundamental company earnings. This