Stagflationary Pressures Reemerging in the USA
Recent mixed data from the USA highlight various imbalances across key economic indicators. Sticky inflation, high input costs driven by rising commodity prices and wage increases, along with aggressive federal spending and a softening labour market, pose a significant challenge for policymakers: stagflation.
Once thought to be impossible by economists, stagflation has occurred repeatedly in the developed world since the 1970s. The term "stagflation" was first used by British politician Iain Macleod in a speech before the House of Commons in 1965, during a time of economic stress in the United Kingdom. He described the combined effects of inflation and stagnation as a "stagflation situation."
Federal Reserve Bank of Atlanta GDPNow
The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2024 is 4.2 % as of May 8, up from 3.3% on May 2. After recent releases from the US Bureau of Economic Analysis, the US Census Bureau, and the Institute for Supply Management, the nowcasts of second-quarter real personal consumption expenditures growth and real gross private domestic investment growth increased from 3.2% and 4.1%, respectively, to 3.9% and 6.8%. Meanwhile, the nowcast of the contribution of the change in real net exports to second-quarter real GDP growth decreased from -0.05 percentage points to -0.10 percentage points.
Source: Investing.com
Core PPI data increase MoM
The Core Producer Price Index (PPI) measures the change in the selling price of goods and services sold by producers, excluding food and energy. The PPI measures price changes from the perspective of the seller. When producers pay more for goods and services, they are likely to pass the higher costs to consumers, making PPI a leading indicator of consumer inflation. Recent data released yesterday showed an aggressive increase of 0.5% in Core PPI MoM, beating expectations of a 0.2% increase.
Source: Investing.com
U.S. Producer Price Index (PPI) MoM
The Producer Price Index (PPI) measures the change in the price of goods sold by manufacturers, serving as a leading indicator of consumer price inflation, which accounts for the majority of overall inflation. Recent data released yesterday showed a 0.5% increase in PPI MoM, beating expectations of a 0.3% increase.
Source: Investing.com
Federal Taxes Are Roughly 73% of Federal Spending
Increased government spending is boosting GDP and economic growth across the economy.
Gold prices at all times high
Gold, always considered an inflation hedge and protection against currency debasement, is at an all-time high. Year-to-date, it has seen an approximate $300 increase, or 15%.
U.S. Michigan 1-Year Inflation Expectations
The University of Michigan (UoM) Inflation Expectations measure the percentage change consumers expect in the price of goods and services over the next 12 months. The recent preliminary release showed expectations at 3.5%, hotter than the forecast of 3.2%.
Source: Investing.com
US Personal Savings Rate as a Percentage of Disposable Income
The US consumer is running out of money. This chart clearly shows that US consumers have spent the money received from the government during COVID-19 and are now at the second-lowest levels since the Great Financial Crisis (GFC).
U.S. Initial Jobless Claims
Initial Jobless Claims measure the number of individuals filing for unemployment insurance for the first time during the past week. Recent labour data show an increase in Jobless Claims, higher than expected.
U.S. Michigan Consumer Expectations
The Michigan sentiment index includes two major components: "current conditions" and "expectations." The expectations component is based on answers to three standard questions. Recent data indicate a sudden deterioration in consumer sentiment and market conditions in the USA.
U.S. Michigan Consumer Sentiment
Consumer sentiment, as measured by the University of Michigan, shows a clear decline in the overall outlook of American consumers.
U.S. Michigan Current Conditions
Combating Stagflation
As the Federal Reserve and policymakers deliberate on the best course of action, the primary focus must be on balancing inflation control without stifling economic growth. The lessons from past stagflation periods should guide current policy decisions to avoid repeating historical mistakes. The path forward requires a careful and calculated approach to mitigate the dual threats of inflation and economic stagnation, ensuring sustainable growth and stability in the long term.
Associate Professor Mordechai Katash is an Associate Program Director at UBSS Melbourne CBD Campus.
