Stagflation is returning, but this time it’s not the 1970s.

Stagflation is returning, but this time it's not the 1970s.

High inflation rates have been a source of concern for analysts for the previous two years. Inflation’s sister, stagflation, has received far less discussion.

 

When economic growth and inflation both stagnate, we get stagflation.

 

Historically, low unemployment rates have eased the blow of rising prices. This is due to the fact that price increases are sustainable only when consumers have sufficient disposable income. However, when unemployment is high, and individuals are trying to save money any way they can, it is more difficult for firms to pass on price increases to consumers.

 

High inflation without corresponding economic development is a nightmare for central bankers everywhere since there is nothing they can do to fix the problem. Attempting to rein in inflation by raising interest rates at a time of growing unemployment might have the opposite effect. The risk of higher inflation results from cutting interest rates to encourage the economy.

 

Stagflation was a persistent problem throughout the 1970s and 1980s. It’s making a comeback in a number of countries’ economies right now.

 

Reflecting on the past: Oil prices skyrocketed after the Arab oil embargo on the United States and other nations that backed Israel during the Yom Kippur War of 1973. However, despite the Federal Reserve’s best efforts to combat inflation by raising interest rates, the economy entered a period of contraction.

 

 

The unemployment rate in the United States reached an all-time high of 14.5% in April 1980 and continued to hover above 6% all the way through 1987, with the exception of a few months. Over the course of the same time, inflation hovered around 5% on average and reached a high of 14.6% in 1980.

 

Around this time last year, the President of the World Bank, David Malpass, voiced his worry about the possibility of stagflation as a consequence of supply chain disruptions induced by Chinese prohibitions and Russian oil sanctions.

 

 

 

The warning was not only from Malpass, however. Treasury Secretary Janet Yellen remarked in May that “higher food and energy costs are having stagflationary impacts,” meaning that they are reducing production and expenditure and increasing inflation throughout the globe.

 

“Valid throughout that period of time,” Lan Ha, director of economic research at Euromonitor International, said of their warnings. She argued that a combination of a mild winter and China’s reopening in late 2022 reduced the likelihood of stagflation.

 

The current situation is that the danger of stagflation varies greatly across geographic areas.

 

Stagflation is not a major concern in China. Chinese consumer prices fell for the first time in almost two years, according to data released on Wednesday from the country’s Consumer Price Index.

 

Central banks in Latin American nations have not suffered stagflation “because they were fast to boost rates to double-digit levels and have been effective in getting inflation under control,” according to Andrew Kenningham, chief Europe economist at Capital Economics.

 

He said that the United Kingdom and Germany were two great examples of countries where this was already the case.

 

According to the UK’s CPI data for June, consumer price rises are slowing but are still rather high at 7.9%. That’s a lot higher than the Bank of England’s target inflation rate of 2%. Wednesday’s release of the National Institute of Economic and Social Research’s quarterly outlook report included the institute’s prediction that inflation would remain above the goal until 2025.

 

And regarding GDP, the writers of the paper predict dreadful growth. While they do believe the UK will avoid a recession in 2023, they forecast just 0.4% GDP growth this year and 0.3% growth in 2024, with the picture remaining very unclear. Overall, NIESR experts expect the UK economy to contract for five years, which would be the longest stretch of lost growth since the Great Recession.

 

Meanwhile, Germany has just recently emerged from a short recession and is at risk of falling back into one due to a precipitous drop in industrial output in June.

 

What this implies for the United States is that, as Kenningham put it, “the stagflation [risk] there is diminishing” since inflation in the United States has been decreasing for longer, and core inflation has gone down farther than it has in Europe. Because it excludes the impacts of the fluctuating prices of food and energy, core inflation is a more precise indication of overall inflation.

 

 

Given its closeness, “both in terms of more inflationary commodities shocks and broader instability in the area,” Ha argues that the continuing conflict in Ukraine poses a greater threat to the eurozone economy.

 

Ha has said that she is keeping an eye on how harsh weather and Russia’s withdrawal from the Black Sea grain agreement can increase inflation and intensify global stagflation threats.

 

One’s perfume purchasing habits may reveal one’s economic outlook.

Finding more little rollerballs of fragrance might be a porthole into the future of the economy.

 

Pattern, an ecommerce platform that analyzes online product search data across multiple product categories on Amazon and elsewhere, reports that demand for more affordable roll-on perfumes is up 207% this year over last year, followed by a 183% jump in cheaper perfume samplers and a 30% increase in body mists.

 

Even though conventional economic statistics paint a brighter picture, this data suggests consumers are cutting down on spending.

 

Consumers still spend money on things that make them feel better, such as pricey chocolate, perfume, and cosmetics, even when times are tough.

 

The lipstick effect describes how customers continue to spend on little indulgences despite the economic climate.

 

“When you look at the economy, consumer confidence is a bit rattled right now, and consumers are tightening their pocketbook strings,” said Dallin Hatch, a data analyst with Pattern. However, he said that much like the “lipstick effect,” perfume is emerging as the luxury item of choice for customers during times of economic concern.

 

Production of oil in the United States is expected to increase under Biden and set new records, surpassing those set by Trump.

Critics say President Joe Biden’s attack on the oil sector is driving up petrol prices. My colleague Matt Egan adds that despite this, US oil output under Trump is on track to break all previous records.

 

In a historic first, the federal government on Tuesday predicted that the United States would produce an average of 12.8 million barrels of oil per day this year.

 

That’s almost 500,000 BPD higher than 2019’s yearly record. It’s also more oil than any other country produces; Saudi Arabia is second with approximately 10 million barrels per day, although recent voluntary production restrictions have brought it down to 9 million, according to OPEC.

 

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