Stagflation is here
Part 2
You can find part 1 by clicking here.
Let’s get back to talk about stagflation and the main resemblances to the 1970’s period. While some Wall Street titans may disagree with our stagflation thesis, other economists and hedge fund managers are backing it up.
The Fed is doing nothing
During the 1970s, the inflationary pressures were attributed to the Oil Shock and were believed to be temporary.
Nowadays, the Federal Reserve chairman, Jerome Powell, said over and over again that inflation is transitory because it was caused mainly by supply chain disruptions.
And after hitting 12%, inflation did back off in the mid-1970s, dropping to about 5%, and everyone thought inflation would go away entirely on its own. We also start to see inflation rotating down in today’s CPI reports. We must see if inflation numbers will continue to decline.
You notice the synonyms, right?
By 1980, inflation turned around and spiked again, and went to 15%. Before Paul Volcker became Fed Chairman in 1979 under President Carter, the Fed had already pushed up its short-term interest rate to 10%. Inflation continued to zigzag higher under Volcker who jacked up the Fed’s policy rate to 20%.
And that did the job. But the Fed had waited far too long to act and had dilly-dallied around for years hoping inflation would go away on its own, that it was just temporary due to the one-off Oil Shock.
Supply Chain Shocks = Oil Shock
Either you say supply chain disruptions or the Oil embargo, the result is the same → inflation.
Now we’ve got another supply shock, but much broader than the Oil Shock was. This includes the semiconductor shortage which will soon complete its first year, and which is affecting all kinds of products, from consumer electronics and appliances to new vehicles. And there’s a container shortage, shipping bottlenecks, container port congestion, rail terminal congestion, a new vehicle shortage due to the semiconductor shortage, and all kinds of other shortages and constraints.
Not to mention that once in a couple of days we get some sort of headline that the price of some commodity has risen some three digits percent. Some days ago it was cotton. Some weeks ago, a chip manufacturer announced an increase in chip prices… and so on.
The energy crisis may only make things worse.
One in a lifetime event
Many economists said that the 1970’s stagflation was caused by a combination of contradictory policies and one-in-a-century events.
But let’s go a little bit deeper. Isn’t a pandemic that sent countries into recession and closed the economy such an event?
And while JPOW is trying to get to full employment, there were still unemployment benefits, although they expired in september. Sounds contradictory enough to me.
Where is the slow growth coming from?
Delta variant, supply chains, stimulus fading away from the economy, you choose your answer. There are many factors to cause the slowdown in the economy. Although there are many job openings, somehow people don’t fill them.
“The recovery has slowed and the economy has been buffeted by additional shocks,” he said in a speech to the Society for Professional Economists.
Data released this week pointed to a sharp slowdown in Chinese manufacturing, as regulatory pressures and high energy prices shut down some production. Business surveys from the US, UK and Eurozone suggest that activity has slowed as delivery times lengthened and backlogs built up.
The million dollar question
Can the Fed do anything?
Well, some policy makers admitted that the current macroeconomic situation can’t be handled solely with the available tools.
Think about it. If central banks are going to taper and even increase rates, they will only slow down growth and maybe taper inflation expectations for a bit. But this will not solve the supply chain disruptions.
For now, stagflation is here, although it is still bening, and as long as the supply chain disruptions continue, we can’t escape from it.