Stagflation. It’s a word that’s been used heavily by economists in recent weeks, but what exactly does it mean. According to Investopedia, “Stagflation is characterized by slow economic growth and relatively high unemployment – or economic stagnation – which is at the same time accompanied by rising prices.”
In lay terms, stagflation occurs when inflation and economic stagnation – including a rise in unemployment due to a shortage of jobs – happen simultaneously. With a continued shortage of raw materials, increased demand and limited supply, inflation is on the rise in the U.S. and other advanced economies across the globe.
During the 1970s, stagflation occurred in an unprecedented way and some top economists are concerned that with the current conditions compounded by the covid-19 pandemic, it could happen again.
“One can make a case that ‘mild’ stagflation is already underway,” economist Nouriel Roubini wrote in a recent column. “Inflation is rising in the United States and many advanced economies, and growth is slowing sharply, despite massive monetary, credit, and fiscal stimulus.”
Economist Stephen Roach warned last year that a problem with the supply chain could lead to stagflation. He reiterated his concerns in an interview with Quartz. “So you’ve gotten caught in fragile supply chains coming face to face with a massive snapback on the demand side, and the system just became quickly dysfunctional across the board,” Roach said.
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While Roach said he doesn’t think it will be as bad as it was in the 1970s, he does think stagflation possible. “I think the odds of a late-70s-style stagflation – which is really the example I think that’s most important, and where the inflation rate was at or near double-digit rates for a protracted period of time, as was the unemployment rate – I think the odds of that are low,” Rach continued. “But to move up from the rock-bottom inflation and the rock-bottom pre-covid unemployment rate is a distinct possibility.”
Though Federal Reserve Chair Jerome Powell and others like economist Neil Shearing have said they believe inflation is temporary, Roach and others are not so sure.
“The conventional view is that, you know, this is all temporary and that we’ll be able to repair the supply chains and the cost pressures—the disruptions that we’re seeing right now will be resolved. And I’m dubious of that,” Roach said.
“Although not our base case, stagflation has often been accompanied by oil shocks, and with crude prices recently jumping on supply chain disruptions, the risk of oil shocks has increased,” Bank of America strategists Ohsung Kwon and Savita Subramanian told CNN Business.
“The reality [is] that inflation is more persistent and sustainable than the ‘transitory’ camp thought, and that inflation and its causes are in turn slowing economy growth,” Peter Boockvar, chief investment officer for Bleakley Advisory Group, told Bloomberg.