Stagflation fears are on the rise amid commodity price increases and expected Federal Reserve interest-rate hikes.
Stagflation fears are on the rise amid commodity price increases, which have been sparked by the Russia-Ukraine war and the anticipation of Federal Reserve interest rate hikes.
Stagflation is a combination of slow economic growth and high inflation.
The commodity price increases are inherently inflationary — and when consumers see higher food and gasoline prices, they may hold off on spending, thereby depressing growth.
Aggressive interest-rate increases by the Federal Reserve to deal with our high inflation also could hurt growth.
Consumer prices already have soared to a 40-year high of 7.9% in the 12 months through February.
Why Do Investors Worry About Stagflation?
Investors are clearly worried about stagflation. In a Bank of America fund manager survey for March 4-10, stagflation expectations soared to 62%, the highest reading since 2008, and up from 30% a month ago.
Others concerned about stagflation include renowned investor Jeff Gundlach, chief executive of money manager DoubleLine.
Americans “ain’t seen nothing yet” when it comes to rising gasoline prices, Gundlach said in an interview with Magnifi Media, an investment platform.
The national average price for gasoline was $4.32 a gallon Tuesday, up from $3.50 a month ago.
Looking at the economy, Gundlach was bearish.
“I think that the recessionary risk is going up very substantially,” Gundlach said. That’s seen in the decline in the University of Michigan’s Consumer Sentiment Index, he said, which fell to an 11-year low of 59.7 for early March.
“I think we need to start admitting that we’re running into a stagflation situation,” Gundlach said.
Harvard economist Larry Summers, a former Treasury secretary, is on the lookout for stagflation too.
“We’re now facing real risks of a 1970s-type scenario,” he told Bloomberg. “Not quite as high levels of inflation as we saw in the 1970s, but the same kind of broad phenomena of stagflation.”
The Fed needs to raise rates aggressively to quell inflation, Summers said. But that could endanger the economy.
“Monetary policy is an effective tool but it may not be an effective tool without engineering a slowdown,” Summers said. “Without a significant slowdown in the U.S. economy, we’re likely to have inflation be unanchored two years from now” he said.
