Stagflation: Harm or Hype

August’s moribund Jobs report revealing a half a million hiring shortfall compared to consensus, brought out the cat calls of Stagflation. The unflappable Fed Chair Powell is blamed for an expected stagnating economy with high inflation that is nowhere in sight. High inflation and high jobless rates with a contracting economy (Stagflation) only occurred briefly during cyclical downturns in the 1970’s. Those unusual periods were due primarily to the US exit from the Gold standard to a free floating currency system. The Gold Standard concealed pent up inflation. The shock of the new 1970’s fiat currency triggered a wave of  higher inflation and economic contractions. Since the 1970’s repricing of the Dollar and quelling inflation expectations, US Fed Chiefs have adroitly guided our economy toward a  modest economic growth and stable inflation trajectory while pursuing full employment. Today our maximally stimulated economy (GDP) is expanding far above trend with moderate Unemployment and record Job Openings. Inflation has also risen to 13 year highs due to the super charged consumer combined with the reluctance of workers to return for fear of the pandemic. 

The result has been supply chain shocks, higher prices and wage growth above 4%. Have no fear though, core PCE inflation will fall back under 3% once again when Covid related immunity levels are sufficient to truly open the economy and elevate payrolls to pre-Covid levels. One can’t precisely predict the Covid variants and how well immunized naturally and artificially society will be, but our expectation is for more subdued viral outbreaks in 2022 that slays the Stagflation dragon that has yet to appear. We can have a technical quarter or so of Stagflation, but if GDP is heading to zero, falling inflation rates will soon follow. Should uncontrolled viral outbreaks emerge worse than before, causing lockdowns, then we will rinse and repeat the emergency measures of 2020 on the fiscal and monetary fronts.  Our verdict is that Stagflation is more myth than a manifest destiny and thus more hype than risk of harming the economy.  The biggest risk is a Recession from the pandemic escalating at a time when the Fiscal stimulus by our Government becomes politcally paralyzed while consumers curtail spending due to staying at home. 

The dismal jobs report for August revealed that renewed health concerns caused job losses in retail trade, construction, government and health care. The pronounced payroll contraction of 42,000 in restaurants and bars despite exceptionally high job openings correlates well with the August rise in the Covid Delta variant. The Labor Department’s August survey stated that 5.6 million people reported they were unable to work because of the pandemic.  Consumer spending and sentiment also fell last month to the detriment of reopening travel and leisure companies. According to, 20% of those planning to fly have canceled their tickets. Over 5 million workers are needed to match the relatively full employment levels just prior to the pandemic and as long as the fear factor encourages millions to avoid travel and work only from home, the economy will continue decellerating unless an ill advised rush of new fiscal and monetary inputs arrive. Fortunately, the post vaccine fatality cycles continue to be less deadly than the previous and should allow for a more complete and sustained period of social mobility and in person work in 2022. Should another 3 to 5  million return to work over the next year, we should then see supply chains ease and commodity prices contract. The trends thus far are on track for the improvement projected below as US and Global cases have turned lower with far fewer Covid related fatalities than the pre-vaccine peak in January. This will soon be good news for another rebound in small cap modestly in Q4 and more so upon reopening stocks later in the fourth quarter and next Spring. 


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