While experts discuss the chances of a recession in the coming year, the United States is locked in an uncomfortable limbo of stagflation. As the name indicates, this economic situation is characterized by a slower or stagnant growth and a rising inflation.
The GDP of The United States shrank by 1.5% in the first quarter but headline consumer prices rose by 8.6% in May. Investors are concerned about the Federal Reserve’s ability to arrange a so-called “soft landing,” which avoids a recession while decreasing inflation and Fed Chair Jerome Powell recognized the problem in his testimony before Congress this week.
“The baseline is stagflation, which is what we are currently seeing,” Mohamed El-Erian, an economist and the president of Queens College at Cambridge University, told Yahoo Finance. “So you have a baseline that is not very comfortable, stagflation and then you have a risk balance that is off recession.”
He is not alone in his opinion. The monthly fund manager poll conducted by Bank of America revealed the greatest degree of “stagflation concern” since June 2008.
Consumers are on the same page, with the University of Michigan’s consumer mood index “suggesting consumers are fearful about stagflation,” according to ING economists. “The damage was done in family finances as a result of the compression on spending power caused by increased inflation. Only 30.8% of households believe income growth will beat inflation over the next five years.”
Stagflation isn’t simply a problem for the American economy.
The World Bank cut its global growth forecast for this year to 2.9%, down from 4.1% previously and issued a warning: “The global outlook faces significant downside risks, including intensifying geopolitical tensions, an extended period of stagflation reminiscent of the 1970s, including widespread financial stress caused by rising borrowing costs and worsening food insecurity.”
Europe, especially, is vulnerable due to its reliance on Russian natural gas and Ukrainian food products. This was emphasized further by the Eurozone purchasing managerâ€™s index, which fell to a 16 month low in June.
“Stagflation has come,” said Jack-Allen Reynolds, senior Europe economist at Capital Economics, in response to the statistics.
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