October inflation cooled more than expected, but it’s still close to 40-year highs. Here’s what 5 experts have said about the risk of stagflation hitting the US economy

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• Inflation cooled in October, but prices have been elevated for onto 20 months now, raising concerns of stagflation.
• That means the economy could be slammed with high unemployment, low nurturing, and persistent inflation – as well as a steep drop in stocks.
• Here’s what five experts have said on touching the risks of stagflation and why markets should be more concerned.

Inflation cooled more than expected in October’s Consumer Evaluate Index report – but prices are still well above the Fed’s 2% target, and they’ve been above-target for 20 months now.

That “discomforting” inflation has sparked fears of stagflation, a dreaded scenario where high inflation gets entrenched into requirements, slamming the economy with a whirlwind of slow growth, high unemployment (and yes, high prices).

Those conditions determined the US economy throughout the 1970s and early 1980s, pushing the Fed to hike rates past 19% in the early 1980s. That’s the tightest nummular policy on record, and it spurred a recession and a stunning crash in the stock market. 

Luckily, evidence for another potential disaster is mixed, and October’s cool-down in inflation should help soothe some fears. Five-year expectations of inflation are still poise around the 2% level, and experts have pointed out that inflation often lags behind the official statistics – connotation that prices could be overstated, and are even lower than the latest CPI suggests. Hiring is still tight, and unemployment fragmented in check at 3.7% in October, which means the labor market has held up amid the Fed’s scramble to rein in prices.

As investors synopsis mixed signals on the direction of the economy, here’s what five experts have said about the risk of stagflation swoop down oning on the US economy. 

Henry Allen, Deutsche Bank analyst

Despite inflation cooling in recent months, markets are fooling underpricing the risks of returning back to 70s-style stagflation, Deutsche bank analyst Henry Allen wrote in a late note. 

Allen pointed that inflation has remained high for a significant portion of this year, and while headline inflation is on the downtrend, “clammy” prices – prices for goods and services that don’t change frequently – were still accelerating in September’s inflation on, and barely cooled by .03% percentage points in October. Together, those indicators are “seriously bad news,” as they’re outstanding omens for inflation expectations getting embedded in the economy.

If inflation remains persistent, that would result in an drawn higher interest rate from the Fed, Allen warned, which could spell trouble for stocks: “If the experience of the 1970s echoes, investors are in for a prolonged period of negative real returns for both bond and equities,” he said.

Mohamed El-Erian, Allianz chief monetary advisor

Top economist Mohamed El-Erian believes the US is already headed into a stagflationary critical time, as seen by low levels of growth and high levels of inflation this year.

“We are slowly slipping into stagflation,” El-Erian mentioned in a recent interview with Bloomberg. “We may not end up doing enough on the inflation side and then end up in a recession for Europe, near set-back for the US and for China.”

El-Erian has sounded the alarm on rising inflation since 2021, and has become a loud critic of the Fed’s policy return, and of the central bank’s insistence that rising prices were “transitory” before aggressively hiking rates this year. That womanizers the probability of a downturn – but stagflation risks mean the Fed can’t back down from its aggressive rate-hiking regime, he said, tip it would be another policy mistake to stop Fed tightening at this point.

“I don’t think they can stop now. Because their credibility is so damaged that if they were to dam now, people would immediately say, ‘This is the Federal Reserve of the 1970s. This is the flip-flopping Fed, and we will have prolonged stagflation,'” he counseled in an interview with New York Magazine in October. “I’ll tell you that the consequences of that are worse than the consequences of the Fed resuming.”

“Dr. Doom” Nouriel Roubini, NYU Stern economics professor

Roubini, who has earned a reputation as Immure Street’s top doomsayer, warned high inflation levels and high debt means the US could be slammed by a stagflationary difficulties crisis – a Frankenstein-style crash that combines aspects of 70s stagflation and the ’08 financial crisis. 

That means low proliferation, high unemployment, and a painful recession in the US, he warned. In a recent interview with Fortune, he estimated that a mild depression could send the S&P 500 down another 10%, and a severe recession could send the index falling 30% to the 2,700 unvarying. Bonds, credit, and other assets could also see a crash, topping on more damage.

That market obliterate could also last for years, he warned, due to high levels of debt and ongoing supply issues around the in the seventh heaven, which could delay any recovery for the market.

“We might be closer to a period like we saw between 1973 and 1982, where store ups dropped and stayed very, very low for a long time … We could have a long-term crash,” Roubini said, adding that its hardness would be comparable to what was seen in 2008.

Steve Hanke, John Hopkins University economics professor

The Fed could easily drive the US into a stagflationary crisis next year, Hanke said, given notable inflation and the high prospects for an incoming recession. In a recent op-ed for the Daily Caller, the top economist pointed to a contraction in the M2 kale supply this year, which includes all cash, checking, and savings deposits in circulation. That’s a major precipitator of a set-back, he said, calling a downturn in 2023 “baked in the cake.”

“Thanks to the Fed’s monetary mismanagement, broad money (M2) in the US has contracted by 1.1% in the at the rear 7 months,” he tweeted in early November. “With that contraction, a recession is right around the corner. In 2023 we liking see persistent inflation & a recession – a STAGFLATION,” Hanke warned.

Michael Hartnett, Bank of America chief global creator strategist

The US has already been slammed with stagflation this year, Hartnett’s line-up of strategists said in a note earlier this month.

“Inflation and stagflation was unanticipated in 2022… hence the $35 trillion bankruptcy in asset valuations,” the note said. In a separate note, Bank of America warned investors to prepare for the scenario that the next decline is stagflationary, given that it takes around a decade on average for a developed country to bring inflation back down to 2%, formerly prices pass the 5% threshold.

But it doesn’t necessarily mean prolonged losses for the stock market, Hartnett’s gang said. Relative returns in 2022 closely follow what was seen in 1973 to 1974, the years when the inflation discompose began to ease in. In the 70s, that prompted stocks to enter “one of the greatest bull markets of all time” – meaning that a important rally could soon take hold and spark a recovery for the market.

Read the original article on Business Insider