No one’s talking about stagflation these days, and for good reason. Inflation expectations remain quite low in the U.S., although the outlook for prices has been rising over the past year, albeit from a depressed state. As such, the stag part of the equation–a stagnant economy–seems more likely, although one might think otherwise in the wake of the latest GDP report, which superficially looked quite strong. But there may be less to the top-line rise in GDP than it appears, as we discussed.
As for the prospects of stagflation–higher inflation and relatively low economic growth–the Bank of England offers a reason to reconsider the possibilities. The BoE’s outlook for the range of GDP growth ” is as wide as ever but, importantly, it’s sliding down the scale,” FT Alphaville notes today, citing the the Old Lady of Threadneedle Street’s latest Inflation Report. “Whereas the central bank was once forecasting economic growth in the region of 0 to 7 per cent, it’s now forecasting something like negative 1 per cent to 6 per cent.” Inflation expectations, on the other hand, are unchanged.
That’s hardly the end of the world, given the relatively low outlook for inflation generally. But the combination of falling expectations for GDP without the same for pricing pressures is a trend we can do without. Unfortunately, others see the possibilities of stagflation too. Hong Kong may be facing low growth and higher inflation, warns Hang Seng Bank. Meanwhile, economist John Cochrane of University of Chicago recently said: “My biggest worry is stagflation. That is where I am much more pessimistic than everybody else.”