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Stagflation returning?
Central bankers are tightening the U.S. economy as inflation takes hold in a historic fashion. Meanwhile, the unexpected shock of war in Ukraine is slowing global growth. Experts say the moment recalls the “Great Inflation” of the 1970s and 80s. This period is remembered for stagflation, which describes the dual threat of stagnant growth and persistent inflation. Today’s Federal Reserve leaders hope to avoid such a dramatic turn of events. But their plan could backfire, as many root causes of inflation are outside of the bank’s control.
The Federal Reserve is hiking interest rates in an effort to defuse an explosive year of price inflation. But global forces could neutralize the effects of that tightening of monetary policy, and keep inflation high.
Some observers believe the U.S. government may have misread the looming threat of inflation. During the pandemic, Uncle Sam dispersed historic sums of cash to blunt widespread economic damage. Analysts say this stimulus produced strong household savings. A boom in demand for durable goods followed.
