It’s hard not to call what we’re experiencing stagflation at this point, if there are any holdouts left. With growth flat for the first half of the year, growth expectations for the rest of the year muted, inflation continuing to run very hot, and the Federal Reserve (Fed) aggressively raising rates, we clearly have the combination of economic weakness with high inflation that gave “stagflation” its name.
But this is not your 1970s style stagflation and the ultimate consequences of this stagflationary period are likely to be more benign. As shown in the LPL Chart of the Day, while inflation has been high, the unemployment rate has remained very low. The low unemployment rate is keeping the “Misery Index” (the unemployment rate + inflation) muted compared to the 70s and likely to decline further as inflation falls quickly relative to rising unemployment..
“With the workforce as healthy as it is, call it lunch box stagflation. Inflation is high but people are working” said LPL Financial Asset Allocation Strategist Barry Gilbert. “The average unemployment rate during the stagflationary years was 6.7%, and here we sit at 3.7%. That will move higher but it’s likely to remain low by comparison.”
That’s not the only difference. The 10-year Treasury yield has moved dramatically higher but still looks low from the perspective of the 1970s and early 1980s. And the Fed’s rate hikes are a shock after years of the fed funds rate sitting near zero and policy is tight, but from the perspective of the 1970s and early 1980s, rates remain extraordinarily low and are unlikely to hit the extremes of the earlier period.
High inflation and higher rates do come with considerable economic pain and economic growth is certainly anemic. But labor market strength, even if it weakens from here as the Fed tightens, should contribute to economic resiliency. This may create a challenge for businesses, but also is likely to support demand. The unemployment rate is often the last casualty of an economic slowdown and the odds of a recession are increasing, but if we do get a recession, relatively supportive labor markets point to it likely being a shallow one.