It is little surprise that the word stagflation is trending as the world grapples with the possibility of slower economic growth and higher inflation.
Since the fighting began in Ukraine, bond yields in the US have moved lower and equities have trailed off by about 2% globally.1 Meanwhile, the Federal Reserve Bank of Atlanta’s “GDP Now” forecast has plunged to predict zero growth in the first quarter of 2022. Simultaneously, inflation rages and is likely to be pushed higher by surging global energy and commodity prices owing to war, sanctions, and the threat of supply disruptions. It is little surprise that the word “stagflation” is trending as the world grapples with the possibility of both slower economic growth and higher inflation.
Supply is usually the culprit, not demand
The combination of higher prices and lower output generally arises from an adverse supply shock. That’s what happened in the 1970s, when twin oil embargoes in 1973 and again in 1979 stalled growth and pushed up prices. Something like that could happen again, if sanctions or acts of war disrupt the flow of Russian or Ukrainian oil, gas, wheat, corn and other commodities worldwide.
Higher prices would reinforce a demand-driven surge in prices and wages already underway before the invasion. Accelerating inflation followed an unprecedented peacetime fiscal expansion in 2020–2021 that coincided with sluggish production, distribution and labor supply responses owing to pandemic disruptions. Inflation has also been exacerbated by a shift in consumer spending from services to goods that caught producers off guard.
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