Stagflation: Reading the Macro Data

Is it possible that there are signs of stagflation based on last week’s data?

Stagflation occurs when we have a recession, meaning two consecutive quarters of GDP decline, combined with high inflation.

Now, why is it so bad? Because it’s very difficult to combat. The policies used to stimulate the economy and boost GDP growth tend to worsen inflation, while the policies used to control inflation aggravate the recessionary component.

Stagflation in the 70s

With the 1973 oil crisis, a period of stagflation began. What happened? The sharp rise in oil prices caused production costs to skyrocket, leading to an increase in prices. However, demand did not keep up, and consumption dropped, resulting in reduced production and higher unemployment. This combined inflation with unemployment.

Could there be stagflation in 2024 or 2025?

Looking at the current data, there is no immediate cause for concern, but we should remain vigilant.

Let’s see what the differences are:

In the 70s, the following conditions occurred:

• Average inflation of 7.4% annually

• Economic recession and rising inequality

• Low returns in the stock markets

Now, we have:

• High inflation, but still much lower than in the 70s

• Recession (actually, lower growth than expected)

• Unemployment is still very low for now

The concerning scenario would be rising unemployment combined with persistent inflation (which, so far, hasn’t come down despite the FED’s policies, raising some alarms about what’s happening and giving hints that they might want to raise rates instead of lowering them).

Additionally, last week, on 04/29/2024, we saw high PCE (consumer spending) data combined with a slowdown in GDP growth, which caused some panic.

Key data for the week of 04/29/2024:

• Tuesday: Consumer confidence

• Wednesday: FOMC interest rate decision, Powell’s press conference

• Thursday: US trade deficit

• Friday: Unemployment rate and consumer credit

As we can see, there are some very important data points this week, closely tied to what’s been discussed in this post. Be particularly watchful on Wednesday and Friday to see how the market reacts.

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