By: Ken Chase.
With inflation now approaching a four decades high of 8 percent, an increasing number of Wall Street experts have been warning of a return to some level of stagflation. Many of those experts have suggested that the actions needed to combat inflation – specifically interest rate hikes – could negatively impact the stock market, cool business investment, and lead to higher unemployment and a possible recession.
For many, the current levels of inflation bring back memories of the oil shocks of the 1970s and subsequent stagflation. That period saw rising oil pricesand stagnating economic activity. Between 1979 and 1983, the Federal Reserve raised interests rates sharply, as part of a broader strategy to bring down inflation. While that effort was eventually successful, the rate hikes led to record prime interest rates, slowing economic activity, and a recession with even higher levels of unemployment.
Experts have noted that stagflation’s combination of rising inflation, decreased economic growth, and higher-than-normal unemployment can leave policymakers with few good options for addressing the problem. Any attempt to stimulate economic growth can result in an increase in the inflation rate, while rate hikes designed to reduce inflation can slow the economy and result in even higher levels of unemployment.
Nevertheless, recent Fed announcements have indicated that the central bank plans to move aggressively against inflation throughout 2022. While the Fed had planned three rate hikes each for 2022 and 2023, it has reportedly now forecast a total of seven rate increases this year, as well as three additional hikes in 2023.
Leading investors like Carl Icahn and Bill Gross have been at the forefront of the debate over possible recessionary pressures and potential stagflation. Icahn has warned of a recession or even worse economic turmoil, noting the real dangers of high inflation. “Inflation is a terrible thing when it gets going. You can’t get that genie back in the bottle too easily; we saw it in the ’70s,” herecently said. The billionaire also expressed concern about whether the Fed’s efforts to reduce inflation might lead to a recession:
“I really don’t know if they can engineer a soft landing. I think there is going to be a rough landing.”