Stagflation: A period of high inflation combined with a stagnating economy. As the high inflation caused by the aftermath of economic shutdowns persist, many are wondering if we are heading toward a stagflation environment like the 1970s. For those who experienced the 70s, it seems to be an experience that most do not want to re-live. For those of us who have only read about it, the 70’s taught some valuable lessons and are a turning point for modern monetary theory. While anything is possible, our economy is most likely not heading toward the stagflation of the 70’s. Here are some points to consider: • High inflation is expected to continue while supply and labor costs are elevated. Most analysts see these elevated costs persisting into mid-2022, although the base effect will be reduced. The base effect is the comparison of inflation to the previous year. In 2022, inflation is expected to be reduced as we compare prices to 2021 prices. Most economists agree that inflation will return to the 2 -2.5% range sometime next year. • Our economy is still growing. Though economic output is leveling off, we still expect a 5.7% - 6% growth in GDP this year, which is spectacular. • Monetary policy to the 1970’s inflation, led by U.S. Fed Chair Paul Volcker, was to push interest rates up to highs that we haven’t seen since. The result of this hawkish policy was a recession in the early 80’s. Many economists feel our current Fed will follow 1940’s economic policy rather than the 1970’s. In the 1940’s the Fed pegged interest rates with a ceiling of 2.5% to keep long-term inflation low. The result was a sustainable economic expansion.
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