U.S. Faces Stagflation Risk, Investor Gundlach Says
The U.S. economic outlook isn’t great, with inflation raging, the war in Ukraine threatening sharper price increases, and the economic recovery feeling a bit precarious.
Jeff Gundlach, the prominent investor and chief executive of the Tampa, Fla., investment manager DoubleLine, doesn’t provide much comfort on these issues.
“I think we need to start admitting that we’re running into a stagflation situation,” he said in an interview with Magnifi Media, an investment platform.
Consumer prices soared 7.5% in the 12 months through January, the highest total in almost 40 years. And that was before Russia’s invasion into Ukraine, of course.
“The Fed is in a really difficult position, because these price spikes are really going to need the Fed to be aggressive if they’re serious at all about fighting inflation,” Gundlach said. “And we’re starting at such a low rate level.”
Federal Reserve Chairman Jerome Powell said last week that he supported a 0.25-percentage-point rate hike at the Fed’s meeting this month. The central bank’s federal funds rate target now stands at zero to 0.25%.
Gundlach noted the surge of oil prices in recent days. U.S. crude recently traded at $123.66, up more than a third (35%) since Feb. 25, a day after Russia entered Ukraine.
The implications for prices at the pump aren’t pretty, Gundlach said. “So when people are complaining about gasoline, they ain’t seen nothing yet.”
Gasoline prices average $4.17 for the regular grade Tuesday, up from $3.62 a week ago and $2.77 a year ago, according to the American Automobile Association.
The economy is a problem, too, Gundlach said. “I think that the recessionary risk is going up very substantially.” That’s evidenced by the decline in the University of Michigan’s Consumer Sentiment Index, he said. The index fell to a 10-year low of 62.8 in February.
In addition, oil price jumps historically have “led to demand destruction that causes recessions,” Gundlach said. A rule of thumb is that a 50% increase in oil prices can spark a recession, and such a move has occurred in just the past two months, he noted.
