Stagflation fears come back with a vengeance

Some Wall Street strategists are increasing concerned nan U.S. economy could beryllium headed toward a 1970s-style stagflation script amid caller signs of stubbornly precocious ostentation and a cooling economy. 

A drawstring of ostentation reports during nan first 3 months of 2024 each came successful supra estimates, fueling fears that ostentation could beryllium much difficult to conquer than antecedently believed. On apical of that, economical maturation during nan first quarter unexpectedly faltered, rising astatine an annualized gait of conscionable 1.6% – nan slowest complaint since 2022.

"This was a worst of some worlds report: slower than expected growth, higher than expected inflation," said David Donabedian, main finance serviceman of CIBC Private Wealth US, of nan latest GDP data. "The biggest setback is nan acceleration successful halfway inflation, and successful particular, nan services assemblage rising supra a 5% yearly rate."

That operation of economical stagnation and precocious ostentation is what's known arsenic "stagflation," which is regarded arsenic a worst-case result for nan Federal Reserve.

FED'S FAVORITE INFLATION GAUGE RISES FASTER THAN EXPECTED IN MARCH

The arena ravaged nan U.S. system successful nan 1970s and early 1980s arsenic spiking lipid prices, rising unemployment and easy monetary argumentation pushed nan user value scale arsenic precocious arsenic 14.8% successful 1980, forcing Federal Reserve policymakers to raise liking rates to astir 20% that year. 

Stagflation fears surged successful 2022 arsenic nan Fed began aggressively hiking liking rates to quell raging inflation, but those mostly dissipated past twelvemonth amid signs that value pressures were subsiding without a important deed to economical growth. 

WHY ARE GROCERIES STILL SO EXPENSIVE?

However, location person been immoderate signs precocious that ostentation is proving to beryllium stickier than expected, moreover arsenic economical maturation decelerates. 

A female shops for groceries astatine a supermarket successful Monterey Park, California, connected Oct. 19, 2022. (Frederic J. Brown / AFP / Getty Images)

While ostentation has fallen considerably from a highest of 9.1%, advancement has mostly flatlined since nan summer. The latest authorities information shows nan user value scale jumped 3.5% successful March, nan highest level successful six months.

JPMorgan Chase CEO Jamie Dimon is among nan experts who person sounded nan siren precocious complete a imaginable return to nan stagflation script seen successful nan 1970s.

"I deliberation there’s a chance that tin hap again," Dimon, nan main executive of America's largest bank, said past week during a chat astatine nan Economic Club of New York past week. "I interest it looks much for illustration nan '70s than we've seen before."

JAMIE DIMON WARNS INFLATION, INTEREST RATES MAY REMAIN ELEVATED

Some Wall Street strategists are becoming concerned nan U.S. system could beryllium headed toward a 1970s-style stagflation scenario. (John Taggart / Bloomberg / File / Getty Images)

Fed Chair Jerome Powell precocious lamented a "lack of further progress" this twelvemonth connected ostentation arsenic he formed uncertainty connected nan outlook for liking complaint cuts this year. While officials person kept nan action of complaint reductions connected nan table, they person said location is nary urgency fixed nan astonishing spot of nan system and nan consequence of reigniting inflation.

Investors were antecedently betting connected a bid of fierce complaint cuts this year, but they person dialed backmost those expectations pursuing nan hotter-than-expected ostentation reports and cautious messaging from Fed officials.

Hiking liking rates tends to create higher rates connected user and business loans, which past slows nan system by forcing employers to trim backmost connected spending. Higher rates person helped push nan mean complaint connected 30-year mortgages supra 7% for nan first clip successful years. Borrowing costs for everything from location equity lines of credit, car loans and in installments cards person besides spiked.

Yet nan accelerated emergence successful rates has not stopped consumers from spending aliases businesses from hiring, powering optimists connected Wall Street who opportunity nan system is not entering a stagflation scenario.

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The labour marketplace is continuing to chug on astatine a patient pace, pinch employers adding 303,000 caller workers successful March – substantially higher than economists expected. Job openings stay high, and nan unemployment complaint fell somewhat to 3.8%.

"Incomes and user spending roseate solidly successful March, which should supply a small reassurance that nan slowdown successful first 4th GDP reported yesterday is not a motion of a stagflationary economy," said Bill Adams, main economist for Comerica Bank.