When investing, as in horror films, the most terrifying villains are the ones we thought were dead. Stagflation, the economic nightmare of the 1970s characterized by stagnant growth paired with persistent inflation, was supposedly dead and buried decades ago. However, like any good movie monster, it appears to be clawing its way back to the surface, and Americans need to prepare for its return.
The warning signs are unmistakable:
Despite the Federal Reserve’s aggressive rate-hiking campaign over the past two years, inflation remains stubbornly above target. February’s Consumer Price Index (CPI) showed prices still rising at 3.2%, while previous months have delivered unwelcome upside surprises. Meanwhile, GDP growth has begun to sputter, registering just 1.6% in the first quarter, a sharp decline from 3.4% in late 2023.
Even more alarming, the Atlanta Federal Reserve’s closely watched GDPNow forecast model has recently slashed its second-quarter growth projection. When the Fed’s regional banks signal economic deceleration while inflation persists, the stagflation alarm bells should be ringing loudly.
This toxic combination represents the classic stagflation recipe: prices rising faster than paychecks while economic momentum simultaneously loses steam. Conventional economic models struggle to address this scenario, as policies designed to fight inflation typically hamper growth, while growth-boosting measures often exacerbate inflation.
Stagflation is particularly challenging because it confounds traditional economic remedies. When inflation and unemployment rise simultaneously, policymakers face an impossible choice, fighting one problem while exacerbating the other. This dilemma underscores the urgent need for Americans to brace themselves for the possibility of prolonged economic uncertainty.
Elliott Lipinsky
eollaw.com