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Stagflation: How real is the risk?

Russell Price | Chief Economist – Ameriprise Financial
October 19, 2021

Key Points

  • The consequences experienced during historical periods of stagflation are unlikely to fully emerge, in our view.
  • The pace of recovery slowed in recent months, but activity started to recover as COVID infection rates declined.
  • In September, consumer activity reaccelerated and inflation pressures eased.
  • The term “stagflation” resonates with most people right now as inflation pressures are widely recognized and the mid-summer slowdown was apparent. However, comparisons to the 1970’s are misguided, in our view.

The pace of economic expansion softened over the summer amid rising COVID-19 infection rates and ongoing global supply-chain disruptions. The slower pace coincided with surging inflation numbers, leading some to conclude that a period of “stagflation” was upon us. Generally speaking, we do not believe this to be the case, nor do we currently see a period of stagflation as likely to occur.

Though the current economic situation shares some similarities with the 1970’s (primarily rising inflation), we believe the differences are notable. Underlying economic forces, primarily demographics, are thought likely to reassert their deflationary influence on consumer prices as COVID conditions improve, in contradiction to the inflationary demographic situation of the ‘70s (see page 3).

These and other issues are generally why most Fed officials and economists seem to believe that the current inflation impulse will eventually fade as COVID disruptions diminish, the job market slowly normalizes, and transportation networks disentangle. Working out these issues is in the best interests of all; thus individuals, businesses and governments are working hard to achieve these goals.

Neither do we believe it accurate to describe the current economic situation as “stagnant.” Growth slowed somewhat over the summer, from a very strong quarterover-quarter annualized growth rate over the first-half of +6.6%, but consumers and businesses are in good financial shape, in our view, and business activity regained momentum as summer turned to fall. Retail sales surged +0.9% month-over-month in August and +0.7% in September, even though availability of some key goods, particularly automobiles, were still in short supply. Currently, we project real economic growth (Gross Domestic Product) at +3.0% for Q3, accelerating to +5.0% in Q4. A period of stagflation could yet develop, but we believe today’s conditions do not fully support that outlook.


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