Fear Of Stagflation Hits 13-Year Highs

At the end of last week, Google searches related to stagflation touched levels not seen since February 2008, as investors and ordinary citizens watch a continued rise in prices amid a recovery that shows signs of fatigue. . Although the International Monetary Fund reiterated ad nauseam that the global economy does not even come close to the scene lived in the 1970s, its shadow is lengthening in the United States.

After all, the activity data has disappointed, see for example the employment data for September on this side of the Atlantic, while the leading indicators point to a new loss of momentum in the world economy. At the same time, concern about inflation continues to mount, and that concern has spread to central banks as well, which once held almost uniformly that high inflation was only temporary.

However, with prices rebounding 5.4% year-on-year in September in the US and a “perfect storm” of factors including bottlenecks and supply problems as well as a lack of labor, a market labor that does not manage to speed up its recovery and a winter marked by the rebound in energy prices.

Transitory inflation?
Kristalina Georgieva herself, managing director of the IMF, acknowledged when asked by this newspaper that she had been impressed by “the deep and exhaustive debate” held by central bankers and finance ministers in recent days at the annual meeting of the institution. Georgieva said that inflation should be temporary but clarified that we must be “very vigilant” because there are other factors that could put pressure on prices.

Still, in the US there are more signs of a somewhat more permanent rise in inflation than of a worrying slowdown in growth. The rapid normalization of the consumption of services is still somewhat more uncertain, but the consumption of goods has remained much better than expected, in part supported by the significant excess of savings. Proof of this was evident in retail sales for September, which rose 0.7% month-on-month.

“Investors are rightly focusing on the role that supply chain bottlenecks and rising commodity prices have played in slowing the global economy and rising input costs. “explains Ellen Zentner, an economist at Morgan Stanley. Yet he insists that slowing growth and rising prices do not define stagflation. Also, remember not to underestimate the role of demand. According to Zentner, in the US, the slowdown in growth has bottomed out, the unemployment rate continues to decline and much – but not all – of the increase in inflation will disappear next year.

The rise in prices of raw materials, particularly energy, which has been the epicenter of the history of stagflation, reflects both the increase in demand and the lack of supply. The escalation of refining margins, the improvement in mobility statistics and the sharp reduction in inventories while production increases, reinforce the strength of this demand. Most importantly, the rise in oil prices to over $ 80 a barrel suggests that there has not yet been a smash in oil demand, challenging the stagflation narrative.

While in the US many investment desks, economists and Fed officials are reluctant to equate the current outlook with that of the 1970s, Citi is already observing a short period of stagflation for China. Its economist, Aaron Liu, warned in a report distributed to his clients how the power cuts in the Asian giant highlight the possibility of this risk materializing.

“The limitation of thermal energy caused by tight supply and rising coal prices, coupled with the export-driven industrial boom and” dual power control “have led to sudden power outages in China. The economic implications are consistent with the contraction of the PMI. That is why the country could enter a brief period of stagflation “, justifies Liu.

Producer prices rose 10.7% over the previous year in September, the fastest pace since November 1995, according to the Asian giant’s National Statistical Office on Thursday morning. In addition, it is estimated that GDP grew only 5% in the third quarter.

Energy Will Weigh in the Pocket of Americans
Americans got other bad news last week. This winter, heating bills will be higher. According to the Energy Information Administration (EIA), nearly half of American households that heat their homes primarily with natural gas can expect to spend an average of 30% more on their bills compared to last year.

The agency adds that bills will be 50% higher if winter is 10% colder than average and 22% higher if winter is 10% warmer than average.

At the same time, the national consumer is already suffering in gasoline prices the rise of more than 65% in oil prices so far this year while those of natural gas have soared more than 112% since January.

Since last October, gasoline prices have risen about $ 1.10 per gallon (3.1 liters) and are currently hovering at $ 3.27 per gallon, according to the American Automobile Association. The price could continue to climb as West Texas Intermediate surpassed $ 80 a barrel this week for the first time since 2014 and maintains its run toward $ 100.

Bruce Kasman, chief economist at JPMorgan, acknowledged in a note to his clients that periods of rising oil prices are often troublesome as they bring with them broader disruptive elements with potential burdens on growth. “We have an increase in energy that will be a drag on growth in the fourth quarter,” he warns, while clarifying that he does not see a recession “but in which we must worry that it affects growth significantly.”

According to Bank of America, rising inflation on this side of the Atlantic has already cost US consumers $ 87 billion, or 0.6% of GDP, from January to August 2021. This has probably been a major factor in downward revisions to growth in 2021.