Stagflation on The Horizon for US Economy, but No Repeat of The 1970s
The comments below are an edited and abridged synopsis of an article by Howard Schneider, Reuters
Recent projections from the Federal Reserve have sparked concerns of a potential stagflation-lite scenario in the US, reminiscent of the 1970s, but without the severity. Stagflation, a combination of high inflation and rising unemployment, is making waves in economic discussions, particularly as the US navigates the impact of President Trump’s economic policies.
In the 1970s, stagflation was marked by a sharp rise in both inflation and unemployment, exacerbated by oil price shocks and policy missteps. The Ford administration’s “Whip Inflation Now” campaign failed to curb the mounting issues, leading to a decade of economic stagnation. The US economy’s performance was one of the worst since the Great Depression, driven by flawed policies and ineffective interventions.
Fast forward to today, and stagflation is once again a topic of conversation as the US faces trade policies, tariffs, and deregulation under Trump. Despite the rhetoric of job creation and tax cuts, many economists are wary of the potential outcomes of these policies, especially regarding inflation. Historically, a weak economy with rising unemployment tends to counteract inflation, but recent price hikes, driven by trade disruptions and tariff shocks, have economists rethinking their predictions.
The Fed’s latest projections point to a period of higher inflation and unemployment than initially expected. While the forecast isn’t as dire as the 1970s, there are concerns about a mild stagflation scenario in the near future. Economic growth is expected to slow, and unemployment is set to rise, though it remains far from the severe conditions of the 1970s.
Economists such as Joe Brusuelas of RSM suggest that this could indeed be a stagflation-lite situation, where the trade shock and inflation increases could be temporary. However, the uncertainty surrounding the long-term effects of tariffs adds to the unpredictability. Despite the Fed’s cautious outlook, including an expectation of interest rate cuts, they remain hopeful that tariff-induced inflation will be short-lived. The lessons from the early pandemic period, when inflation was deemed transitory and later proved persistent, highlight the challenges the Fed faces in managing this delicate economic balancing act.
In conclusion, while the US may be headed toward a mild form of stagflation, it’s unlikely to mirror the devastating economic environment of the 1970s. The global economy, with its complex interplay of trade policies and inflationary pressures, continues to evolve, and the outcome remains uncertain.