Combine economic stagnation and rising inflation and what do we get? We get stagflation -- the financial markets' fear du'jour.
It had been nearly half a century ago when the global economy have had its last encounter with stagflation. he first episode came in the mid-1970s. US CPI inflation surged from a low of 2.95% in August 1972 to 12.1% by December 1974 while the US economy stagnated, with annual GDP growth collapsing from 7.6% in 1973 to negative 2.3% by 1975. The unemployment rate soared from 4.6% to 8.6% over the same period. The same scenario played out in the mid-1980s.
The "great moderation" - strong growth with moderate inflation - that followed, had largely consigned stagflation to baby boomers' memories. Even more so after the global financial crisis, when years of stronger growth and record low unemployment rates failed to significantly lift inflation (low-flation).
Case in point, US headline CPI inflation averaged 1.84% in 2019 (the year before the covid-19 pandemic struck) at the same time that the average jobless rate has fallen to 3.7% -- the lowest level since the late 1950s.
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The same could be observed across many, if not most, global economies. So much so that, not only the US Federal Reserve, but most major world central banks have been hard at work trying to get measured inflation up to their targets.
The covid-19 pandemic initially brought down growth and inflation and the unemployment up. Although the pandemic and its more virulent variants continue to haunt to this day, social restrictions have been relaxed and businesses have resumed operations. All thanks to people on Planet Earth learning to live with the virus due to increased take-up of vaccinations.
This, in turn, released consumers' pent-up demand, placing pressure on factories to increase production to satisfy household needs and wants - from computer chips to pasta to (more) toilet paper.
Manufacturers need raw materials to manufacture these products. Factory demand - from oil and coal to power their machineries to other commodities such as aluminium and copper - coupled bottlenecks in supply chains, including port delays and a shortage of shipping containers (that affects delivery and availability of raw materials) - are adding to upward pressure on input prices, which they're now passing onto retailers that are then passed on to consumers.
Voila! We now get the "flation" part of "stagflation". The JP Morgan Global PMI survey showed that both input costs and output charges accelerated for both the manufacturing and services sectors in September.
But where's the "stag"?
Recent indicators suggest that while global economic growth has moderated from this year's high, activity continues to expand. Better, the September JP Morgan Global PMI survey showed the composite PMI edging higher to a reading of 53.0 from 52.5 in August, with both manufacturing and services remaining above the 50 expansion/contraction demarcation.
There's no "stag". However, there is a risk that inflation becomes more enduring. Higher prices would constrain consumer spending that would be constricted even more when central banks are forced into aggressive policy tightening to tame rising prices. This would turn the current growth moderation into economic stagnation.
But chances are the spike in inflation is going to be transitory as the Fed and the European Central think (hope). Inflation would ease as more and more factories return to full production, supply chain bottlenecks are cleared and pent-up consumer demand returns to normal.
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