Stagflation In 2024? Red Sea Crisis Could Trigger Domino Effect For Global Costs

Dimon’s concerns stand in contrast to some economists’ optimistic market expectations of a soft landing after inflation cooled from a four-decade high in June 2022 following relentless interest rate hikes by the Federal Reserve. The Fed has held rates steady since July canadian forex review and signaled three rate cuts this year. In recent days this has pushed oil prices back up towards $80 a barrel and the main risk is that further escalation, now that U.S. forces have struck against the Houthis in Yemen, could push commodity prices even higher.

If stagflation is caused by rising wages, wage control could be implemented to limit rapid wage increases which are causing price inflation and reducing profit margins. At the time, there was a belief that high inflation led to low unemployment but during the 1970s unemployment and inflation both rose. A recalibration of economic policy to focus on low unemployment and price stability was necessary to halt stagflation. Stagflation is a term used to describe an economy experiencing significant inflation, high unemployment, and slow to no economic growth. The term is a portmanteau that combines the words stagnation in GDP and inflation.

Additionally, take a look at any adjustable-rate debt you may have — credit cards, mortgages, student loans — and see if you can pare those balances down or refinance them. Now that interest rates are poised to go up, those balances will become more expensive. “This is the absolute time for people to batten down the hatches and beef up the foundation of their financial house,” Jenkin said. A more likely scenario is that if we end the year with a series of interest rate hikes by the Federal Reserve, we could be in a recession by 2023, he said. “If we had a situation where unemployment rose pretty sharply, I actually think that would likely cause inflation to start coming down pretty sharply,” Bivens said. While there were some nasty recessions back then, many economists aren’t expecting a return to anything like that now, he said.

The central bank’s and government’s attempt to regulate the economy often leads to them making the wrong choices. For example, prior to the 1970s, the U.S. was focused on maximum employment across their economy after the Employment Act of 1946, which inadvertently caused inflation to increase and impacted employment and growth. Should we soon find ourselves in this situation, the consequences could be catastrophic. As Roubini points out, private and public debts are much higher than in the past, accounting for about 350% of global gross domestic product (GDP) because interest rates were low for ages.

  1. She noted that the U.S. gross domestic product shrank at an annual rate of 1.4% over the first three months of this year, even as inflation remained historically high.
  2. The Bank of Canada raised its benchmark lending rate by half a percentage point in April, to one per cent, marking the biggest single increase in more than two decades amid ongoing concerns over high inflation.
  3. Should the supply of food, oil, or something else that’s essential be disrupted and become no longer able to meet demand, things tend to get off-kilter.
  4. The term is a portmanteau that combines the words stagnation in GDP and inflation.
  5. Instead, 80% of economists in the same survey named stagflation as the greater long-term risk to the economy, according to the Securities Industry and Financial Markets Association.

In such a situation, prices surge, making production costlier and less profitable, thus slowing economic growth. That caused huge issues in the car dependent United States where oil prices remained elevated even after the embargo ended in March 1974. To avoid stagflation, governments adopt economic, monetary and fiscal policies; but they don’t always go hand in hand. Governments must strike a balance between lowering interest rates, increasing public spending and other ways to stimulate economic growth. So tightening monetary policy and other measures can also help put the brakes on. If oil prices start to decline and supply-chain bottlenecks clear, inflation could start trending down in the second half of 2022.

Inflation vs. Stagflation: What’s the Difference?

Stagflation is a term coined in the 1970s when there was simultaneous high inflation and economic stagnation or high unemployment, according to Jonathan Wright, professor of economics at Johns Hopkins University. In an interview with Bloomberg following the April rate hike, Bank of Canada Governor Tiff Macklem said he is quite certain that policymakers will be able to avoid a return of 1970s-style stagflation. Today in America and Europe, unemployment is low and inflation high, suggesting that one indicator of stagflation, high unemployment, is missing. And as in some previous inflationary episodes, there is still a good chance that once the current surge in prices has dissipated, inflation rates will come back to normal, though at a higher overall price level than previously expected. And if price increases stay high for long enough, consumers could begin to expect constantly rising prices as the new normal and will change their behavior accordingly, creating a self-fulfilling inflation cycle.

Now that this is changing, a storm is brewing, with higher borrowing costs threatening to push leveraged households, companies, financial institutions, and even governments into bankruptcy and default. Bank of Canada deputy governor Toni Gravelle gave a speech last month arguing that Canada is not about to experience a rerun of the 1970s. Unemployment is at a record low, and the country’s economic growth outlook remains relatively strong. Unlike many advanced economies in Europe and elsewhere, Canada tends to benefit from higher global oil prices as a major energy exporter. A second theory states that stagflation can be a result of a poorly made economic policy.

“Now is not the time for a small business to go to the bank and bet the business to do an expansion.” The lack of purchasing power ripples through the economy, denting business revenue and draining savings, Harvey said. For months, sky-high prices have pummeled the budgets of everyday Americans. Stagflation is uncommon, but it has happened a couple times in the last several decades. The most notable case of stagflation took place in the 1970s, afflicting most Western economies. Karl Montevirgen is a professional freelance writer who specializes in the fields of finance, cryptomarkets, content strategy, and the arts.

Example of U.S. Stagflation

This occurs when governments institute monetary tightening regulations such as raising the federal interest rate or a reduction in the money supply. A theory created by economist Jonathan Nitzan and Shimshon Bichler, the differential accumulation explanation of stagflation argues there is a relationship between mergers and acquisitions, stagflation, and globalization. This was partly based on the Phillips Curve, an economic model that was used to argue that there was an inverse relationship between unemployment and inflation. Economists have since identified many potential factors that influence stagflation including a sudden supply shock and harmful government policies. There’s no question that we’re currently experiencing record-high inflation.

Notably, although energy costs remain important for industrialized countries, they matter less now than they used to. In the U.S., every dollar of economic output takes 70% less petroleum to produce than it did in the ’70s. On rare occasions, however, high inflation persists even as the economy slows and unemployment rises, resulting in stagflation, she said. According to Leslie Preston, Senior Economist at TD, stagflation is a combination of stagnation and inflation.

Supply theory

The echoes are reviving concerns about “stagflation,” a term coined during that earlier period that has become synonymous with double-digit price increases, job losses and images of motorists queueing for gasoline. Macleod used the term again on 7 July 1970, and the media began also to use it, for example in The Economist on 15 August 1970, and Newsweek on 19 March 1973. John Maynard Keynes did not use the term, but some of his work refers to the conditions that most would recognise as stagflation.

Our top picks of timely offers from our partners

As in the 1970s, today’s commodity price spike is crimping economic growth, particularly in oil-importing countries. The surge in inflation, meanwhile, is pushing central banks to raise interest rates rapidly to cool down consumer price growth. This is already slowing economic activity, particularly in the housing market. Inflation was already picking up in the late 1960s and early 1970s as a result of rising government spending. Central banks, meanwhile, maintained a monetary policy that was too accommodative – keeping interest rates too low and expanding the money supply – in the belief that they could trade slightly higher inflation for lower unemployment. This proved to be a costly miscalculation, as people adjusted their expectations about inflation and both consumer price growth and unemployment remained high.

Is Stagflation Curable?

This is a combination that isn’t supposed to occur, in the logic of economics. Nixon removed the last indirect vestiges of the gold standard, bringing down the Bretton Woods system that had controlled currency exchange rates. There is no real consensus among economists about the causes of stagflation. They have put forth several arguments to explain how it occurs, even though it was once considered impossible.

Economic Downturn To Worsen?

But Mr. Gravelle argued that this can happen without causing a large spike in unemployment. “Right now, job vacancies are very high … Employers could stop looking for new workers but keep the ones they have – with little impact on the unemployment rate. Central banks also have a lot more credibility today than in the 1970s, thanks to three decades of low and stable inflation which started in the 1990s. This has helped keep people’s long-term expectations for future inflation relatively well anchored, despite the current runup in consumer prices. “Global factors pushing up on prices, particularly energy prices … could potentially cause inflation to remain high or rise further, even if  the domestic economy is starting to weaken,” Hunter said.

답글 남기기