Olivier de Berranger

Is this stagflation or rather a spectre or phantasy?

The word “stagflation” is starting to appear lately certain analysts’ commentaries and headlines in the specialist press. Synonymous with dark days for the economy, it’s a concept offered as an explanation for recent weakness in equity markets after seven months of consecutive rises. Whilst we understand the media’s appetite for this term, the reality of the situation is quite different.

Global growth: slowdown instead of stagnation

In a nutshell, stagflation refers to a self-perpetuating phenomenon characterised by strong inflation, sustained economic stagnation, and entrenched high levels of unemployment. The concept was popularised in the 1970s after the first oil shock in 1973. At the time, inflation was extremely high, peaking at 12.3% in the US in 1974, and caused by the shock of an especially brutal disruption in the supply of energy commodities (oil in particular). Meanwhile, demand was petering out in developed countries after three decades of sustained economic expansion. The situation at present is completely different. Global demand is extremely strong, particularly in developed countries. Indeed, inflation has been caused by this strong demand in an environment of temporary supply constraints in the aftermath of the COVID-19 crisis. And global economic growth is forecast at 4.5% for 2022, after close to 6% this year, which hardly qualifies as stagnation.

The “stag” element of stagflation is therefore a misnomer in the current environment. However, there are some aspects of the economy that are worrying. We have probably seen the peak of the recovery. Persistent bottlenecks in global production chains, which emerged in China and then spread to developed countries, could eventually depress demand. Some sectors are still vulnerable; Evergrande’s recent woes illustrate the delicate situation of Chinese real estate. However, for the most part, we are talking about fears of a slowdown in the rate of expansion, and not expectations of stagnating growth.

New Price Increases Ensure Persistently High U.S. Inflation

On the other hand, the second element in stagflation refers to inflation, and this is a more serious consideration. Of course, we are far from the levels of 1970-1980 and the causes are very different, but the issue is looming, particularly in the US. Although the price hikes in goods and services that contributed to the surge in inflation in the spring – for second-hand vehicles in particular – are starting to subside, others are beginning to pick up the slack. Prices are now rising for goods directly affected by global supply chain shortages, such as furniture and new vehicles. Producer prices also continue to accelerate strongly, and this phenomenon is exacerbated by the recent surge in energy prices, particularly for natural gas and coal. Real estate prices have soared by close to 20% year-on-year in the US, and this will soon feed through into the inflation basket calculation.

Lastly, wage rises in response to labour shortages are likely to unleash the type of wage-price spiral that will hold inflation at a relatively high level. Over the last decade, productivity gains have largely restricted the impact of wage rises on inflation. Nevertheless, pressure is increasing in the US. According to the most recent employment report published on Friday, many sectors saw wages grow by 0.5%, or even more, over the month. So, although it may be rather phantasy to talk of stagflation today, inflation is very much a reality.