Photo credit: WOCinTech Chat, March 24, 2016, https://www.flickr.com/photos/wocintechchat/ https://creativecommons.org/licenses/by/2.0/
The U.S. economy is headed towards stagflation and it is likely to happen fast, leaving some markets reeling from the contagion effects, according to a top investment banker at Ray Dalio’s Bridgewater Associates.
Investors are too optimistic about the path for inflation and interest rates, said Bob Prince, co-chief investment officer of Bridgewater.
He said he predicts that the economy is headed toward stagflation, which occurs when high inflation is coupled with economic slowdown and indicators that employment levels are falling.
“We are headed towards it. We are on the cusp of it,” Prince told Bloomberg TV.
Described as the world’s biggest hedge fund, Bridgewater has $223 billion of assets under management as of February 2022 and its clients include pension funds, endowments, governments, and central banks.
When high inflation mixes with a weak job market, it couases a “toxic brew that punishes consumers and befuddles economists,” Paul Wiseman wrote for AP. “For decades, most economists didn’t think such a nasty concoction was even possible.”
Prince is not alone in warning about stagflation. Top economist Mohamed El-Erian and Harvard economist Larry Summers also warned of it. Goldman Sachs predicted in January that the U.S. Federal Reserve will either keep hiking interest rates into stagflation or it’s hoping to set the country up for a recession.
U.S. inflation is running at its hottest in nearly four decades amid surging consumer demand, but growth has held up so far. Other economists have warned that growth could slow and the economy could enter a recession as the Federal Reserve continues to raise interest rates to cool consumer prices.
Rising energy and commodities prices caused by the destabilization of the war in Ukraine have analysts talking of a return to 1970s-style stagflation, in which inflation rose as the economy stagnated or went into recession.
The war in Ukraine is already causing a spike in inflation globally due to a slowdown in global supply chains, the prices of goods rising in the supermarkets, gas pumps and almost everywhere else.
In April, the U.S. consumer price index (CPI) figures – which measure a broad range of goods and services – showed prices rising by a monthly rate of 0.3%, down from 1.2% in March, the first fall since August 2021.
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But the annual inflation rate, which came in at 8.3 percent and lower than the 8.5 percent recorded in March, remained close to a 40-year high.
Prince told Bloomberg TV that the bond market shows investors are being too optimistic about inflation, with longer-dated bonds priced as though inflation will cool sharply.
“The markets are under-discounting the inflation picture,” Prince said. “The sustainability, the self-reinforcing of the inflation is not discounted. The degree of tightening over time is not discounted.”
Photo credit: WOCinTech Chat, March 24, 2016, https://www.flickr.com/photos/wocintechchat/
https://creativecommons.org/licenses/by/2.0/
