The Federal Reserve’s recent decisions have stirred fresh concerns of stagflation—an economic dilemma marked by high inflation, weak growth, and rising unemployment. With inflation climbing and wage growth rebounding, the economy appears to be heading toward a crisis reminiscent of the 1970s. Here’s a breakdown of the unfolding situation and its implications.
Inflation: A Troubling Resurgence
🔷 Core inflation remains above 3.0% for an alarming 43 consecutive months, defying expectations of stabilization.
🔷 Historical parallel: In the mid-1970s, inflation peaked near 12%, dropped toward 4%, but rebounded dramatically by 1980. Today’s inflation trajectory since 2020 mirrors this unsettling pattern.
🔷 Recent uptick:
1-month annualized PCE inflation is nearing 4%.
3-month annualized PCE inflation is back above 2%, signaling persistent upward pressure on prices.
Monetary Easing: Fuel for Inflation
🔷 Following the Fed’s pivot toward rate cuts, financial conditions eased dramatically, undermining the impact of earlier rate hikes.
🔷 This relaxation has inadvertently allowed inflationary forces to regain strength.
Wage Growth: A Double-Edged Sword
🔷 Wage metrics, initially a sign of economic recovery, are rebounding toward 4% growth—well above the pre-pandemic average of ~2%.
🔷 Increased labor costs are being passed down to consumers, further driving prices higher. What seems like a win for workers may worsen inflation.
Labor Market Struggles
🔷 Youth unemployment has surged to 9.5%, the highest since August 2021, reflecting a weakening job market.
🔷 Non-farm payroll revisions show over 1 million fewer jobs than previously reported in the past year, a sign of overestimated job growth.
Signs of Stagflation Emerge
🔷 Wage growth, inflationary pressures, and slowing employment growth point toward stagflation, reminiscent of the 1970s economic crisis.
🔷 The US Indeed Wage Growth Tracker shows wages rebounding, not returning to pre-pandemic growth rates, adding to inflationary concerns.
Recession Risks on the Rise
🔷 Treasury yields are skyrocketing, as markets brace for prolonged inflation and delayed Fed action.
🔷 Oil prices have crashed, complicating the economic outlook and raising recession odds.
🔷 Mortgage rates:
Despite the Fed’s 50 basis point cut in September and 25 basis point cut in October, mortgage rates have surged past 7%, with projections of hitting 8%+ soon.
A Crisis in the Making?
🔷 Fed Chair Jerome Powell has acknowledged the Fed’s hesitation, stating there’s no hurry to reduce interest rates. This signals the realization of missteps, but is it too late?
🔷 The Fed’s primary objective to avoid stagflation—a deadly combination of rising unemployment and inflation—appears to be slipping away.
Conclusion: Lessons from the 1970s
🔷 The current economic trajectory mirrors the troubling patterns of the 1970s. Inflation is resurging, wage growth is compounding costs, and unemployment is creeping upward.
🔷 If the Fed doesn’t act decisively, the U.S. risks revisiting the economic turmoil of the 1980s—characterized by double-digit interest rates, soaring inflation, and stagnation.
The coming months are critical. Will the Fed navigate these choppy waters effectively, or are we destined for a new era of stagflation? The stakes have never been higher.