Economists warn that fears of stagflation are on the rise. Bloomberg reports that stagflation expectations have grown 66%, the highest expectation since 2008.
Stagflation is usually defined as a period of slow economic growth coupled with high unemployment. However, that is not always the case.
According to Investopedia, stagflation could also be defined as a period of inflation combined with a decline in the Gross Domestic Product.
In the current economic climate, the United States is facing the latter. On Monday, the World Bank stated that it projects a downward trend in growth for the 2022 U.S. economic season, along with a 40-year inflation-high. This could create the perfect climate for a potential stagflation period, despite the current relatively low unemployment rate.
In January, the World Bank had projected growth of 4.1%. However, on Monday, the bank announced that it had revised its projection downward to 3.2%, according to Zero Hedge.
World Bank President David Malpass stated that the decline is due to numerous factors, including the financial outlook of European and Asian countries. According to Reuters, these global economic contractions are due to increased food and energy prices.
The Financial Times noted their research stating that stagflation will occur this year due to the ongoing war in Ukraine, which has slowed efforts to bounce back from the COVID-19 pandemic.
The International Monetary Fund or IMF, which works to ensure economic stability in 190 countries, is set to downgrade its global economic outlook.
The economic forecast is gloomy and full of unknown factors, and the war in Ukraine has added fuel to the fire of uncertainty.
IMF managing director Kristalina Georgieva called the war a “major setback” for the global economy.
The United States has experienced only two instances of stagflation in its history, both occurring in the 1970s. Each of these instances overlapped with recessions.
Bloomberg points out a pattern for stagflation, noting that a shock in the oil supply was present in each instance, along with high inflation and high unemployment. Oil prices have hit record highs in recent weeks.
According to the U.S. Bureau of Labor Statistics, the unemployment rate for March 2022 was 3.6%, while price growth hit a 40-year high of 8.5%.
While the unemployment rate is lower than what is typically seen during a stagflation period, the concern is that the geopolitical climate, skyrocketing oil prices, and rising inflation will hurdle the U.S. and Europe into stagflation.
The Financial Times quoted Brookings Institution Senior fellow Eswar Prasad, who stated, “Each of the world’s three big economic blocs faces considerable difficulties. While spending remains strong in the U.S. and the labor market has returned to pre-pandemic conditions, inflation poses severe difficulties for the Federal Reserve’s price stability mandate”.
Prasad stated that there would be no easy way to deter the possibility of stagflation nor negate the effects of the Ukrainian war on the global economy. He noted that curbing the downward trend and getting the global market back on track will take concentrated efforts such as limiting supply disruptions, settling geopolitical tensions, and focusing on infrastructure as a long-term goal and solution.
