Sliding Towards Stagflation?
Skyrocketing oil prices are adding to already record-high inflation and threatening a global growth slowdown. The trend has drawn comparisons to the 1970s, when the economy and markets were plagued by widespread food and energy shortages, soaring interest rates and a lingering selloff.
With the war in Ukraine ongoing and central banks on the move, are we falling into another stagflationary trap?
It’s easy to see the case for inflation.
With Brent prices spiking as high as $139 a barrel in March, and inflation numbers across the world reaching multi-decade or record highs, the 1970s comparisons are understandable. If oil prices stay high, it could be a longer road for inflation to meaningfully moderate, even as consumers shift their spending back towards services from goods and base effects come into play.
The rise in commodity prices is particularly problematic for Europe. Energy had already accounted for half of the region’s rise in consumer prices in 2021, and it sources 20% of its energy consumption from Russia.
In the U.S., while expectations for near-term inflation have rocketed, longer-dated measures remain more reasonable. For instance, U.S. consumers expect inflation over the next three years to be notably lower vs. one year ahead. This suggests that they believe they can weather the storm of higher prices — a prescient point for those worried about a wage-price spiral.
The near-term inflation risk is very real and higher prices seem inevitable — but the danger of this threat comes down to how high oil prices spike and how long they stay elevated. In particular, we’ll be watching for any signs of long-term inflation expectations de-anchoring.
Risks of stagflation in Europe are growing as commodity prices spike and uncertainty remains high, putting the European Central Bank in a tough spot. Yet, it’s also worth noting that fiscal spending, such in energy and defense, could cushion some of the fallout.
In the U.S., continued inflation seems likely, but stagnation is still just a risk we are watching. It seems inconsistent with the latest data, which still suggests robust economic growth. We believe the Fed can land the plane, but it will need to steer carefully.
As the macroeconomic backdrop evolves, so too does the investment opportunity set. Higher inflation and interest rates provide a compelling case to get out of cash and consider other liquidity options. Further, after years of neglect, core fixed-income once again looks compelling. Last, volatility is bringing new equity market opportunities to the fore.
Rick Barragan is the Managing Director,
Los Angeles Market Manager, for J.P. Morgan Private Bank.
[email protected] | (310) 860-3658
privatebank.jpmorgan.com/los-angeles
