“Back to the future.”

Stagflation seems our fate.

Just the point. "People's Unemployment Line,” Philadelphia, 2020. (Joe Piette, Flickr/ cc by NC-SA 2.0.)

26 JANUARY—The current turbulence in the financial markets, combined with ongoing inflationary pressures, suggests we’ve reached a dangerous economic inflexion point—and not for the first time. If the signals now coming our way turn out to be accurate, Americans could be in for a brutal 1970s-style stagflation in  coming years, but one that could make the 1970s look halcyon by comparison given today’s massive private debt levels.

High levels of private debt probably preclude the Federal Reserve’s tightening cycle getting far, Fed Chair Jerome Powell’s talk of higher rates notwithstanding. And while faltering markets and a recent spate of economic data (all of which point to slower growth) would be expected to temper inflationary momentum, the surprise could be inflation’s resilience. 

All of which—persistent inflation, sluggish growth—would indicate the possibility of a return to 1970s style stagflation. This may already be upon us if the recent data are anything to go by. 

Last month gave us a cascade of weakening economic indicators: The consensus forecast for December was for positive retail sales growth.  In fact, core retail sales were down 3.6 percent after revisions. Manufacturing output was supposed to be up.  It was down 0.3 percent. The Michigan Consumer Sentiment Index fell 2 points. As if to confirm the grim picture, the Census Bureau reported today that in December, when we’re all supposed to be out there shopping, retail inventories rose in percentage terms by more than in any single month since 1990. 

And here’s the kicker: This constellation of data comes against the backdrop of a consumer price inflation level that broke the 7 percent level for the first time in over 40 years.

For much of capitalism’s post–World War II “golden period,” it appeared that policymakers had found the holy grail between inflation and unemployment. They believed that inflation was tolerable because it meant the economy was growing and unemployment would stay at low levels.

In fact, inflation was more than tolerable during the most of the 1950s and ’60s: The consumer price index averaged less than 2 percent annually, and no one batted an eye lash. And growth was roaring as pent-up savings were finally unleashed after the privations of World War II, when consumer goods were virtually unavailable, and rations and bond sales limited most Americans’ spending power. These benign conditions that characterized the post-WW2 period persisted into the late 1960s.

Things began to change in the 1970s, however, with the rise of a relatively new phenomenon: stagflation.