What is Stagflation?

What is Stagflation?

Stagflation occurs when an economy endures stagnant or negative growth while inflation remains stubbornly high. This combination is painful because the usual policy tools clash: raising rates to curb inflation risks deepening the downturn, while easing policy to support growth can fuel even more inflation.

Recognizing the Pattern

• Weak activity: Falling GDP, soft industrial production, and deteriorating business surveys.
• High inflation: Persistently elevated CPI/PPI readings, often driven by supply shocks like oil spikes.
• Labor stress: Rising unemployment or reduced work hours despite tight labor markets.
• Anchored expectations? Watch breakeven inflation and wage growth to see if households expect higher prices for longer.

Implications for Forex

Stagflation tends to weigh on growth-sensitive currencies (AUD, NZD, EM FX) while supporting safe havens (JPY, CHF) and commodities tied to the supply shock (oil exporters). Real yields often fall if inflation outruns nominal rates, highlighting policy credibility issues and pressuring the domestic currency.

Trading Approach

• Favor defensive pairs or hedges such as gold and inflation-linked bonds.
• Short currencies whose central banks are stuck between conflicting mandates.
• Reduce leverage and widen stops—headline-driven volatility increases.
• Reassess positioning after each major data print; the narrative can shift quickly.

Advanced Guidance

Build a repeatable, rules‑based process so decisions are consistent across sessions and instruments. Start from context (higher‑timeframe structure, positioning, macro tone), then define precise triggers and invalidation on execution charts. Track spread and depth so your order type matches conditions. Pre‑compute scenarios (breakout, fakeout, mean‑revert) and map actions for each to reduce hesitation.

Execution Framework

• Plan entries at levels with confluence (structure, momentum, time‑of‑day).
• Place stops beyond the logical invalidation, not arbitrary distances.
• Target at least 2–3R; scale out methodically and trail remainder.
• Avoid thin liquidity windows unless the setup explicitly requires it.
• Record slippage and spreads; poor fills can erase edge.

Review Loop

• Journal setups by session and pair to learn where they excel.
• Tag trades by catalyst (news, trend continuation, range breakout).
• Recalculate expectancy monthly; prune underperforming variants.

Risk Controls

Keep daily loss limits, reduce size after consecutive losses, and pause during regime shifts. Survival enables compounding; treat discipline and execution quality as part of your edge.