As inflation remains high and economic growth slows, the ghost of "stagflation," haunts the US.
Stagflation made 1970s difficult and eventually brought an end to the post-WWII global economy system.
Everybody, from investors to consumers, wants to prevent another outbreak of coronavirus.
10 Things in Politics: Get the latest news in politics and economics Loading... Click Sign up to receive marketing emails and other offers from Insider.
American economic activity was on a high note this summer, as many displaced workers found new employment and consumers saw a sharp rebound. Wall Street was also doing well, with major stock indexes increasing for seven consecutive months.
The economic climate changed when summer turned into fall. Inflation is a possibility in the United States. The US labor market has been slowing down and there are some signs that it may be back. The country is now heading towards a scenario that was last seen in the 1970s economic disaster: the feared "stagflation".
The ghost of stagflation is now haunting the fragile recovery following the pandemic. This brutal combination of high inflation and stagnant economic growth, is known as stagflation. After the 1970s stagflation, policymakers are determined to avoid another disruption by the coronavirus crisis.
Data company FactSet discovered that the number of references to "stagflation," in company documents, is at its highest since 2008. This was even before the third quarter earnings season kicks off. Research notes are being produced by bank analysts on the subject.
We are heading for stagflation 2.0. This will have devastating economic consequences for many years.
Memories of 1970s dog economists
The US has seen inflation rise to above 5% over the past three months. Inflation also rose to a new high of 13.5% in the eurozone in September, a record for the region. Although central banks have been claiming that inflation will soon disappear for most of the past year, they seem less optimistic lately.
Inflation that appears more permanent is "temporary", and the Delta coronavirus virus wave has slowed the rapid growth of earlier this year. Both August and September saw a dramatic slowdown in the US job market. Supply shortages have caused a surge in energy prices, which has led to some European and Chinese factories having to cease production.
Many Wall Street workers feel the sting of stagflation, and it brings back painful memories from the 1970s.
It's not surprising that the 1970s were the decade that gave birth to gritty films such as "Taxi Driver" or aggressive music like punkrock. That decade saw the explosion of rising prices and high unemployment that shook the economies and societies in the developed world.
After two decades of relative stability and prosperity following World War II, it was shocking to see the rise in unemployment. They were willing to accept price increases if the job market was healthy after the Great Depression and deflation in the 1930s.
As oil prices rose, the US and global economies fell into recession. Richard Nixon made changes to international finance rules by depegging the dollar from its gold counterpart. This was a major change in the financial system that had been at the foundation of it since World War II. Despite slower growth, inflation spiraled out of control. The price of oil rose to double digits by end of decade. All of the factors responsible were the oil-price shock and high levels government spending. Unions also pushed up wages.
The resultant stagflation was devastating for businesses and households, and it shattered the old way of thinking economics. This led to new ideas being popularized by governments and central banks, especially in the US and UK. They were inspired by Milton Friedman's economist Milton Friedman to reduce government intervention and concentrate on inflation control. Although the new system was able to bring back growth, it also created the conditions for new problems such as rising inequality and the 2008 housing and financial crisis.
Inflation could be exacerbated by rising energy prices
Stagflation could return and make the post-pandemic period a massive firefighting exercise. The signs are increasing: US oil prices have risen to a seven year high, while European natural gas prices have risen by more than 500%. Analysts are now questioning earlier predictions that inflation would fade.
US stocks fell in September, and have been rocky since October. Investors worry that inflation will continue to eat away at their investments, even though growth slows. Susannah Streeter from Hargreaves Lansdown, a market analyst, said that worries about stagflation have become an anxiety attack.
There are positive signs. Analysts believe that the growth rates of economies all over the globe are expected to be higher in 2021 than in previous years. The unemployment rate in advanced countries has remained relatively low.
Markets are still jittery, and the stagflation debate is likely to continue. Trader and economists will be scouring every data release looking for signs of slowing growth and persistent price increases. They'll pray that the 1970s are over. The next decade is at risk.
