Inflation in October cooled more than expected but is still close to the highs of the last 40 years. Here’s what 5 experts said about the risk of stagflation hitting the US economy

Paul Volcker, former Fed chairman from 1979 to 1987.

  • Inflation cooled in October, but prices have been rising for more than 20 months, raising concerns about stagflation.
  • This means that the economy could be hit by high unemployment, low growth and persistent inflation, as well as a sharp decline in equities.
  • Here’s what five experts have said about the risks of stagflation and why markets should be more concerned.

Inflation has cooled more than expected in the October Consumer Price Index report, but prices are still well above the Fed’s 2% target and above the 20-month target.

That “sticky” inflation has sparked fears of stagflation, a feared scenario where high inflation takes root in expectations, slamming the economy into a maelstrom of slow growth, high unemployment (and yes, high prices).

Such conditions defined the US economy in the 1970s and early 1980s, prompting the Fed to raise rates above 19% in the early 1980s. This is the tightest monetary policy ever recorded, spurring a recession and a dramatic stock market crash.

Fortunately, the evidence of another potential crisis is mixed, and October’s slowdown in inflation should help calm some fears. Five-year inflation expectations are still hovering around the 2% level, and experts have pointed out that inflation often lags behind official statistics, which means that prices may be overstated and are even lower than suggested. the latest CPI. Hiring is still scarce and unemployment remained under control at 3.7% in October, meaning the labor market held up despite the Fed’s rush to rein in prices.

As investors digest mixed signals about the direction of the economy, here are what five experts said about the risk of stagflation falling on the US economy.

Henry Allen, Deutsche Bank analyst

German bank

Despite the cooling of inflation in recent months, markets are seriously underestimating the risks of returning to 1970s-style stagflation, Deutsche Bank analyst Henry Allen recently wrote.

Allen pointed out that inflation has remained high for a significant portion of this year, and while main inflation is trending down, “sticky” prices – prices for goods and services that don’t change frequently – were still accelerating in the year. inflation report for September, and just cooled by 0.03% percentage points in October. Together, these indicators are “seriously bad news”, as they are the main portents for inflation expectations taking root in the economy.

If inflation remains persistent, that would result in an even higher interest rate from the Fed, Allen warns, which could create problems for equities: “If the experience of the 1970s repeats itself, investors are bound for a extended period of negative real yields for both bonds and equities, “he said.

Mohamed El-Erian, Allianz Chief Economic Advisor

Mohamed El-Erian
Mohamed El-Erian

Leading economist Mohamed El-Erian believes the US has already entered a stagflationary crisis, as evidenced by this year’s low growth and high levels of inflation.

“We are slowly slipping into stagflation,” El-Erian said in a recent Bloomberg interview. “We may not end up doing enough on the inflation side and then end up in a recession for Europe, close to a recession for the US and China.”

El-Erian has sounded the alarm about rising inflation since 2021 and has become a strong critic of the Fed’s policy response and the central bank’s insistence that the price increase was “transient” before increasing in rates aggressively this year. That increases the likelihood of a downturn, but stagflation risks mean the Fed cannot withdraw from its aggressive rate hike regime, he said, warning that it would be another political mistake to stop the Fed from tightening at this point.

“I don’t think they can stop now. Because their credibility is so damaged that if they stop now, people would immediately say, ‘This is the Federal Reserve of the 1970s. This is the flipping Fed and we will have a prolonged stagflation.'” , he warned in an interview with New York Magazine in October. “I’ll tell you the consequences of that are worse than the consequences of continuing the Fed.”

“Dr. Doom” Nouriel Roubini, professor of economics at NYU Stern

rubies

Roubini, who has earned a reputation as Wall Street’s leading gore, warned that high inflation levels and high debt mean the US could be hit by a stagflationary debt crisis, a Frankenstein-style collapse that combines aspects the stagflation of the 1970s and the financial crisis of 08.

That means low growth, high unemployment and a painful recession in the United States, he warned. In a recent interview with Fortune, she estimated that a mild recession could send the S&P 500 down another 10% and a severe recession could send the index down 30% to the 2,700 level. Bonds, credits and other assets could also collapse, with increased damages.

That market rout could even last for years, he warned, due to high levels of debt and ongoing supply problems around the world, which could delay any market recovery.

“We may be closer to a period like the one we saw between 1973 and 1982, where stocks went down and stayed very, very low for a long time … We could have a long-term slump,” he said. Roubini, adding that its gravity would be comparable to what we saw in 2008.

Steve Hanke, professor of economics at John Hopkins University

Steve Hanke Johns Hopkins Finance Lesson

The Fed could easily lead the US into a stagflation crisis next year, Hanke said, given high inflation and the high prospects of an oncoming recession. In a recent editorial for the Daily Caller, the leading economist pointed to a contraction in the M2 money supply this year, which includes all deposits of cash, checks and savings in circulation. This is a major trigger for a recession, he said, calling a recession in 2023 “baked in pie.”

“Thanks to the Fed’s monetary mismanagement, the broad currency (M2) in the United States has contracted 1.1% in the past 7 months,” he tweeted in early November. “With that contraction, a recession is just around the corner. In 2023 we will see persistent inflation and a recession: a SEAGFLATION,” Hanke warned.

Michael Hartnett, Bank of America’s chief global equity strategist

Bank of America
A sign hangs above a Bank of America branch in the Financial District on November 1, 2011 in Chicago, Illinois. Bank of America Corp. has reportedly announced that it will abandon its plan to charge customers a $ 5 per month fee for making purchases with their debit cards.

The US has already been hit by stagflation this year, Hartnett’s team of strategists said in a statement earlier this month.

“Inflation and stagflation were not expected in 2022 … hence the $ 35 trillion drop in asset valuations,” the note read. On a separate note, Bank of America warned investors to prepare for the scenario where the next recession is stagflationary, as on average a developed country takes around a decade to bring inflation back to 2% once prices exceed 5%. theshold.

But it doesn’t necessarily mean prolonged losses for the stock market, Hartnett’s team said. Relative returns in 2022 closely follow what was seen from 1973 to 1974, the years in which the inflationary shock began to subside. In the 1970s, this prompted stocks to enter “one of the greatest bull markets of all time,” which means that a major rally could soon take hold and trigger a recovery for the market.

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