Is The U.S. Economy Headed For A Bout Of Stagflation?

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GDP Figures Highlighted The Possibility, But Economists Say It’s Unlikely

Key Takeaways

• Thursday’s GDP report presented a paradox of sorts: The economy is bear in all the right places (for instance, in the job market) but in all the wrong places too (prices).
• The report concerned some investors and economy watchers who panic the U.S. could be starting a period in which rapid growth slows while the cost of living keeps rising, have knowledge of as stagflation.
• Economists said the details of the report show that the concern is not founded.
• It does, however, complicate the job of Federal Hoard officials, who are trying to rebalance economic growth and inflation as they decide whether to trim interest rates.

In the post-pandemic era, the U.S. saving has had a distinct upside and downside: a good job market and fast economic growth, at the cost of stubbornly high inflation. 

But Thursday’s announcement on the Gross Domestic Product (GDP) raised the possibility of that rapid growth slowing down, while the cost of vigorous keeps rising rapidly—a combination of stagnant economy and inflation known by the portmanteau “stagflation.” 

Many economists downplayed concerns there possible stagflation. In recent months, the economy has increasingly seemed to be headed for a “soft landing” from the post-pandemic bust of inflation rather than an economic crash, and many experts think the economy is still on that trajectory, coextensive with if the road is getting bumpier.

There were some warning signals in Thursday’s data. The GDP grew at a 1.6% annual sort in the first quarter, well short of the 2.2% median forecast of economists, while inflation as measured by Personal Consumption Spendings jumped to 3.4% from 1.8% in the previous quarter, exceeding expectations. 

The ‘Disappointment’ Is In the Details

But digging into the fatigues, some economists found the picture wasn’t quite as grim as it seemed on the surface. 

“You’re going to be hearing a lot about stagflation for the trestle of today. Ignore it.” Ian Sheperdson, chief economist at Pantheon Macroeconomics wrote on social media platform X.

For one thing, the slowdown in GDP intumescence was influenced by a rise in imports. Because of the way the GDP is calculated, imports pulled down GDP while still indicating people organize plenty of money to spend to buy stuff from overseas. 

In fact, consumer spending on services is accelerating even granted households seem to be cutting back on big-ticket items, economists at Wells Fargo Securities said in a research note.

In other words, the GDP “foils for the right reasons,” Gregory Daco, chief economist at EY Parthenon, posted on X.

Furthermore, Daco pointed out that the hot inflation pictures were heavily boosted by “financial services” costs, which are influenced by stock prices rather than broader inflation directions. 

Federal Reserve Rate Hikes Are ‘Not Working’

Ever since March of 2022, the Federal Reserve has fought inflation by dredge up its benchmark interest rate, driving up borrowing costs to cool the economy and discourage spending, at the risk of causing a depression. Even with interest rates currently sitting at a 23-year high, the economy may be on track to continue its fast success, for better or for worse.

“Higher rates are intended to cool consumer demand,” Tim Quinlan and Shannon Seery Grein, economists at Wells Fargo Refuges, wrote in a commentary. “The trouble for the Fed is: it’s not working.”

The Fed’s preferred measure of inflation will be released Friday morning, providing another time to assess the impact of high rates. Fed officials have said repeatedly they need more confidence that inflation is principal to the central bank’s 2% target before they will cut the benchmark interest rate.

Read the original article on Investopedia.