The first of three jobs reports out this week indicated the first sign of weakness in the US labour market, putting the Federal Reserve in a tricky position in its battle to return inflation to its targeted range.
Figures on job openings and factory orders are pointing towards a potential recession for the world’s largest economy, but the upside might be a pause in interest rates which would typically be a positive for stocks.
“The concern is the Federal Reserve might have to sound the retreat before its war on inflation is truly done,” Danni Hewson, head of financial analysis at AJ Bell. “This could leave us with the worst of all worlds – the dreaded stagflation where the economy is shrinking but prices are continuing to surge higher.”
And with inflation still at 40-year highs, the Federal Reserve adopting a hawkish stance, a still-broken supply chain, and geopolitical events like the war in Ukraine creating all sorts of wild cards, stagflation is becoming more and more part of the conversation.
What is stagflation?
Stagflation is an economic phenomenon characterized by a combination of stagnant economic growth, high inflation, and high unemployment.
This is an unusual and challenging situation for policymakers, as the traditional methods of boosting growth (such as lowering interest rates) may exacerbate inflation, while measures to combat inflation (such as raising interest rates) may further depress economic growth and increase unemployment.
Stagflation can occur when the economy is hit by both supply-side and demand-side shocks, such as a sharp increase in oil prices, disruptions to supply chains, or a sudden drop in consumer or business confidence. These factors can lead to a decrease in productivity, higher production costs, and reduced consumer spending, which in turn, can cause a rise in prices and a slowdown in economic activity.
Stagflation is generally considered to be a challenging economic environment as it can be difficult to address the multiple problems simultaneously. To combat stagflation, policymakers may use a combination of measures, such as targeted fiscal policies, monetary policies, and structural reforms, to address both the supply and demand sides of the economy.
Contact Sean at sean@proactiveinvestors.com