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No Stagflation

Mike Zaccardi

WE SPEND TOO MUCH time worrying about stagflation. The term describes a period of high inflation with stagnant growth—a disastrous economic condition. It was seen at times during the worst of the mid-1970s recession, and again when inflation spiked in the early 1980s.

Do we see it today? No way.

Everyone over 60 surely recalls how difficult it was decades ago. Consumer prices were out of control. The unemployment rate jumped. Real wages were on the decline, while stock and bond prices were also dropping.

Blogger and investment expert Michael Batnick notes that the S&P 500 fell 51.8%—including dividends, but after inflation—from January 1973 to September 1974. At the same time, long-term Treasurys experienced a real bear market of their own, losing 21.1%.

Real gross domestic product (GDP) contracted 2% in 1974. The Misery Index, which adds together the unemployment and inflation rates, soared to 20 that year. It was the worst of times, part I.

The early 1980s brought part II. The Misery Index again spiked above 20. The inflation rate peaked just shy of 15%, while the jobless rate climbed to 7% in 1982. Real GDP growth was barely above zero from 1979 through 1982.

That was stagflation. Today’s economic landscape doesn’t compare. Sure, a lot can change, as fellow HumbleDollar writer John Lim recently noted. But core inflation looks to top out early next year at around 5%, according to Bank of America analysts. Meanwhile the Federal Reserve’s GDP growth estimate eases from 5.9% in 2021 to a still-robust 3.8% in 2022. Next year, the unemployment rate might even dip under 4%, or so says the Federal Reserve.

As we head into the holiday season, let’s put away this nonsense that stagflation is gripping the U.S. economy. We could conceivably get there. But we aren’t anywhere close right now.

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Roboticus Aquarius
Roboticus Aquarius
1 year ago

Anything that causes significant pain is remembered for a very long time… and it influences our behavior for as long as it’s remembered. I was still in grade school in that time period, but I remember how my parents reacted to it, and absorbed the FUD in newspaper articles and Time magazine.

I agree, now is little like that era. It’s been a long time since we’ve had growth so robust that general prices rose with it. This is the first big jump in prices in over a generation, inflation hasn’t exceeded 4% since 1991, and it hasn’t jumped more than 2% YTY since 1980. It’s a shock.

I think a lot of people are reacting to the pain of that shock without taking a moment to smell the flowers of their wage and wealth increases, both of which are increasing rapidly. For many years this past decade my salary barely kept pace with healthcare costs. This is the first year I can remember in a long time where my salary increase far outpaced my healthcare increases. I suspect the same is true for a significant number of people, many of whom simply don’t realize it and are only cognizant of the higher costs they are experiencing.

But also, I suspect our economy is more bifurcated, with more communities that get left behind… experiencing the price increases without the wage growth. A lot depends on which segment of the economy one is most exposed to. For these people the great economy offers little help; they are seeing real financial pain.

I think both of these groups are unsettled at the moment, and their fears of runaway inflation are heightened. Change is difficult to understand, and those who benefit often seem unaware of it until some time has passed. For ten years I’ve been heavily invested and optimistic about the US recovery, while sentiment kept anticipating crash after crash after crash. Sentiment is often out of step with reality.

Last edited 1 year ago by Roboticus Aquarius

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