Are We In or Entering Stagflation?

[38Chevy454]

I am curious what your opinions are al;ready inn if we are entering a stagflation economy.

Stagflation is characterized by slow economic growth and relatively high unemployment (economic stagnation) which is at the same time accompanied by rising prices (inflation). Generally stagflation occurs when the money supply is expanding (made worse by free govt handout money) while supply is being constrained (pending rising interest rates). Quick rise in oil prices is also a trigger for stagflation, which we all feel at the pump or heating bill lately. All of these characteristics seem to fit the current economic situation. One thing that is not yet known is that stagflation also typically has a reduction in GDP. I think it's too early to know those numbers, although I suspect with so many supply chain issues that GDP will be less in spite of the seemingly high pent up demand from the shutdowns early last year.

Some key points taken from an Investopedia article:

• Stagflation refers to an economy that is experiencing a simultaneous increase in inflation and stagnation of economic output.
• Stagflation was first recognized during the 1970s when many developed economies experienced rapid inflation and high unemployment as a result of an oil shock.
• The prevailing economic theory at the time could not easily explain how stagflation could occur.
• Since the 1970s, rising price levels during periods of slow or negative economic growth have become somewhat of the norm rather than an exceptional situation.

Also from Investopedia:
There is no definitive cure for stagflation. The consensus among economists is that productivity has to be increased to the point where it would lead to higher growth without additional inflation. This would then allow for the tightening of monetary policy to rein in the inflation component of stagflation (that is easier said than done, so the key to preventing stagflation is to be extremely proactive in avoiding it).

IMHO it seems we currently have stagnant growth combined with inflation. I think we are in stagflation, even if some in gov't are trying their best to avoid the term. What do you say?

 

[VanWinkle]

I don't see the similarities to the prior stagnation period, but anything is possible.

 

[USGrant1962]

I don't see it that way. 4th Quarter 2021 GDP is not out yet, but estimates are about 5%. This quarter might be lower but Omicron is blowing through quickly and, thankfully, government is not proscribing shutdowns any more.

Setting Covid aside, GDP has been growing at an anemic but steady 2-3% for many years. I would guess that will be the case for the next few years. Stagflation also featured high unemployment, around 8% in mid-1970s, which we are not seeing now.

So inflation, yes, but stagflation like 1974-1975, no.

 

[Mr._Graybeard]

I suspect that Russia's saber rattling is a big factor in the rise in crude oil prices, just as the Iranian revolution sent oil prices soaring in the late '70s. But Iran came after OPEC put the squeeze on the world economy. I don't think Russia's output alone can be that impactful. It could pose problems in Europe, though.

IMO, stagflation came about largely because of oil costs, and also because of the demographic bulge of the baby boom entering into its acquisitive phase. Lots of people buying things and looking for work at the same time. Employers are begging for workers right now.

 

[aja8888]

We don't have high unemployment and wages are rising overall as inflation heats up. Wars are prosperous for the U.S. as we make lots of armament, fighters, other vehicles, etc. Stagflation also results in people going on a buyer's strike and that is not going on at all.

 

[OldShooter]

... What do you say?

I say I don't know and I don't think anyone else does either. The economists can't even say whether we are in a recession until after it has gone on for a quarter or two.

The most digestible discussion of economic forecasting is IMO in Nate Sliver's book "the signal and the noise." The chapter is "How to Drown in Three Feet of Water."

 

[timbervest]

I would not think we are in for traditional stagflation. The economy is for the most part strong fundamentally and interest rates are still low although rising (but remember 10 year treasury was 3.2% only back in 2018 so we have some leeway). IMHO today's inflation is driven mostly by short term disruptive factors (supply chain disruptions limiting supply coupled with pent up demand from not spending during the pandemic) that will eventually stabilize . Saudis have plenty of oil in the ground and there is a price point when domestic production becomes profitable so there is probably a cap on oil prices. Not a lot of long term structural headwinds. Near term market activity is mostly driven by fear and uncertainty (the S&P is all the way back to where it was just last October so I don't think this is a crash). Of course YMMV.

 

[Exchme]

After WWII, the rest of the industrial world lay in rubble, and it took a generation to rebuild, the stock market had hardly had a bad year since 1941 and meanwhile the US had gotten fat and sloppy.

The Vietnam war was going badly and US involvement was ending with a loss, Watergate shook people's confidence some more, Middle East countries were flexing their muscles with oil embargoes and gas lines. Since it was a goods producing economy, it was very sensitive to the price of oil and oil prices nearly tripling between 1972 and 1975 and then doubling again from 1978 to 1980 were impossible shocks to handle.

Add other factors back then like super high marginal tax rates that hampered investment and poor societal treatment of women and minorities, it's probably a wonder that that decade wasn't worse.

We are far from perfect today, but I'll easily take today's problems over the ones back then.

 

[chassis]

No stag, the real economy is cranking. Spend time on the FRED site and you will not see stagnation as defined in the op.

 

[mrfeh]

I am curious what your opinions are al;ready inn if we are entering a stagflation economy.

No.

 

[scrabbler1]

No to the OP's question, for many of the reasons stated here already.

As a college student in the early 1980s taking economics courses (I majored in it), I recall the term "stagflation" mentioned with another term similar to it: The Misery Index. One simple definition (at the time) of The Misery Index was adding the inflation rate to the unemployment rate and the interest rate. Even without adding the interest rate, the sum of the other two indicators was at its highest in the mid and late 1970s. Adding the interest rate only made things look worse.

Today's Misery Index (under that simple definition) is nowhere near what it was in the 1970s, although there is a recent uptick in it.

https://en.wikipedia.org/wiki/Misery_index_(economics)#Variations

 

[Koolau]

Not yet. It could happen quickly with just a couple of things hitting the fan ($150/bbl oil, for instance.) Then again, though I lived through Stagflation before I'm no expert so YMMV.

 

[Gumby]

I don't think so. Capacity utilization is still relatively low, so economic output has room to grow. Unemployment is low, but a good portion of that is the effect of the Great Resignation. I think people will be more inclined to reenter the job market as Covid wanes (and as they run out of savings). Current inflation is result of both increased demand for goods rather than services and supply restrictions, both of which are due to Covid. I see both problems easing.

 

[JoeWras]

I say no.

As a teenager in the late 70s, I would have killed to get a job as a grocery stocker or even fast foods. Those jobs were nearly non-existent to a teen in my area. They were being taken by all the laid-off older (20s) folks.

Teen employment, with a real W-2 statement, was difficult. Day laboring wasn't even a thing since I lived in a highly unionized area.

Today it is different. There are plenty of jobs for a willing teen with a clean police record.

 

[USGrant1962]

4th quarter 2021 GDP growth came in at +6.9%, no no stag in our stagflation yet. For CY2021 GDP grew 5.7% with all the stimulus (government spending itself is a big part of GDP).

Looking at various series on FRED, it appears that savings are starting to approach normal levels again, so the demand spike from stimulus may begin to wane. This article says "economists predict"* around 4% growth in 2022.

https://www.marketwatch.com/story/coming-up-u-s-fourth-quarter-gdp-11643289488?mod=home-page

* I know, economists make astrologers look respectable.

 

[Magus]

Not yet. Government spending and transfer payments have kept demand high. That may wear off later this year though or in 2023, and if inflation is still hot, we could be there.

 

[AlabaMalaysia]

To me as a 37 year old not living in the 70s but talking with my mom about it that we don't have the same conditions for stagflation. Regarding GDP growth my generation over the next 10-15 years is going to hit their prime leverage years with a lot of pent up demand due to student loans and living with mommy and daddy too long that will stimulate GDP expansion most likely.

 

[Bamaman]

I don't know about stagflation, but whatever it is will hurt--especially the lower middle class that never saved for their retirement years.

I just hate to see people working into their very senior years.

You read online about people that only have $25K or less in their retirement accounts, and the percentages of the population are pretty astounding. My wife always said, "but they had money for beer, cigarettes and new tattoos."

 

[aja8888]

You read online about people that only have $25K or less in their retirement accounts, and the percentages of the population are pretty astounding. My wife always said, "but they had money for beer, cigarettes and new tattoos."

Three 50+ year old people in my extended family have less than that saved. I never mention the retirement word when I am around them.

 

[clifp]

No not today.

But it is certainly possible in the future.

 

[W2R]

This may take a little time... I'll let you know