Is stagflation upon us?

by Paul Lengemann, BullsnBears Economist

On Tuesday/Wednesday the Fed will hold its July Open Market Committee meetings. The policy-setting gathering is certain to keep its main rate unchanged and push for continued easy money. Fed Chairman Powell is sure to reiterate his concerns about the poor outlook for the economy, the miserable political environment and the continued negative impact of Covid19 on the country’s overall prospects.

The weak growth outlook is only part of what worries economists and policy makers. Recently the possibility of a serious resurgence of inflation has entered into those people’s thinking. We don’t see much inflation in the numbers yet, but the huge amounts of money sloshing around in the economy is a worrisome phenomenon.

The conversations surrounding the economic outlooks now center on the possibility of a hefty bout of stagflation about to descend upon us. The prospect of rapid inflation and underperforming growth is something that sends shivers down the backs of all central bankers and financial managers. It is a prospect we now must all face, especially since the Treasury is ready to push another bunch of stimulus money at us. Just when all that cash will meet up against too few goods to buy is unclear, but we probably are close to that point.

The equity markets have not yet shown much interest in the potential stagflation scenario but they soon will be. As a consequence we may see a sharp decline in stock prices everywhere. In the US the decline in market prices could be especially pronounced, something we may see shortly.