A host of economic reports released this week by the U.S. government and private agencies revived fears of stagflation on Wall Street.
Slower Economy Higher Inflation
The advanced GDP report released by the BEA on Thursday morning showed that the U.S. economy lost momentum in Q3 2021. The most comprehensive measure of a nation’s output for a calendar year gained a meager 2% in the third quarter of 2021, down from a 6.7% gain in the second quarter.
Meanwhile, inflation for the goods and services included in the GDP calculations, known as GDP deflator, rose at an annual rate of 5.7% in Q3, confirming that inflation, the old problem of the U.S. economy, remains elevated.
Simply put, the U.S. economy is heading into stagflation, a situation of a slowing economy and rising prices.
Inflation May be Spinning Out of Control
The stagflation scenario was repeated on Friday with new information on the U.S. economy. Personal income, a measure of the pay households bring home from selling their resources to firms and from government benefits, declined at an annual rate of 1% in September, meaning that consumers have less purchasing power going forward. That doesn’t bode well for consumer spending, which counts for two-thirds of GDP.
Meanwhile, the Fed’s most favored inflation index, PCE inflation, rose at an annual rate of 4.4% in September, up from 4.2% in the previous month, meaning that inflation is accelerating.
Then there’s the Employment cost index (wages), which gained 1.5% in September, up from 0.9% in August. Wages have been pushed up in recent months as firms find it hard to compete for workers in a tight labor market, and workers demand higher wages to maintain purchasing power in the face of rising inflation.
Simply put, inflation is beginning to creep into the wage negotiations between households and firms, fueling a price-wage spiral. That’s a classical case of demand-pull inflation and cost-push inflation feeding into each other, which could lead to inflation spinning out of control, as was the case back in the late 1970s.
Bottom Line
While it is too early to determine whether history will repeat itself this time around, one thing is clear: stagflation will be on Wall Street’s radar until new data sheds light on the state of the U.S. economy.
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