Stagflation Returns: Why This Time Is Different

Get Ready For ‘Stagflation Lite’

The U.S. economy might be headed for a bout of ’70s-style stagflation, but economists expect it to be far less severe this time around.

Many forecasters say the U.S. is entering a period of slow economic growth combined with accelerating inflation. At the root of the phenomenon are President Donald Trump’s tariffs, which are pushing up consumer prices and slowing down the job market at the same time.

However,economists expect this bout of inflation to be much less severe than the double-digit annual price increases that plagued household budgets in the 1970s.

On Friday,the government’s Personal Consumption Expenditure report showed that inflation is higher than the Federal Reserve’s goal of 2% per year. And next week’s report on employment is expected to show lackluster job growth.

Key Takeaways

Forecasters expect tariffs to push up consumer prices and drag down economic growth in the coming months. Inflation is expected to accelerate,but not to the ultra-high levels of the 1970s,when the term “stagflation” was coined to describe the economic stagnation and high inflation.
* Stagflation is different from a recession, in which the economy crashes and prices fall.

Stagflation Concerns Rise as Inflation Remains Elevated and Growth Slows

Recent economic forecasts suggest the U.S. economy might potentially be entering a period of “stagflation-lite,” characterized by slowing economic growth alongside stubbornly high inflation. Core Personal Consumption Expenditures (PCE) inflation is predicted to peak at a 3.5% annual increase in the coming year, according to Mark Zandi, chief economist at Moody’s Analytics. https://www.cnbc.com/2024/08/29/moodys-mark-zandi-warns-of-stagflation-lite-as-inflation-stays-high.html While above the Federal Reserve’s 2% target, this is substantially lower than the double-digit inflation experienced during the stagflation of the 1970s.Zandi also forecasts Gross Domestic Product (GDP) growth of 1% annually, less than half the 2.5% average since 2010,but enough to avoid an immediate recession.

What The Fed Can Do

Federal Reserve Chair Jerome Powell recently acknowledged the risks associated with persistent inflation and slowing growth during his speech at the Jackson Hole economic summit. https://www.investopedia.com/fed-chair-powell-keeps-september-rate-cut-on-the-table-11795858

Many economists believe the current situation will be a milder and shorter-lived version of the 1970s stagflation. Chengjun Chris Wu, senior portfolio manager at Federated hermes, suggests that “stagflation-lite will give way, either because inflation soars or because economic growth returns,” and that “full-blown stagflation is rare and likely to stay that way.” https://www.federatedhermes.com/blog/macro-insights/stagflation-lite-is-here

However, Zandi cautions that resolving stagflation may necessitate the Federal Reserve employing similar measures to those used in the 1970s – raising benchmark interest rates to curb inflation, even at the cost of slowing economic growth.

A key factor influencing the Fed’s ability to act independently is the potential for political interference. Former President Donald Trump has publicly called for lower interest rates and has increased pressure on federal Reserve policymakers. https://www.investopedia.com/trump-intensifies-scrutiny-of-federal-reserve-now-targeting-governor-lisa-cook-11794487 With current Fed Chair Jerome Powell’s term expiring in May, a new appointment by a future administration could significantly impact the Fed’s independence. Zandi questions whether the Fed will “remain sufficiently independent after Powell’s term is up in May.”

Sources:

1. CNBC: https://www.cnbc.com/2024/08/29/moodys-mark-zandi-warns-of-stagflation-lite-as-inflation-stays-high.html
2. Investopedia: [https://www.investopedia.com/fed-chair-powell-keeps-september-rate-cut-on-the-table-11795858](https://www.investopedia.com/fed-chair-powell-keeps-september