Maybe this is the year when stagflation returns to America? Half a century has been: The last time the US economy had excessive high inflation and was both high unemployment in the mid -1970s, in 1974 there was unemployment at 12.2% of inflation rates and 8.5% in 1975.
The new stagflation is unlikely to be equally extreme. The latest inflation report came at 3% for 2024, from 2.4% in September. Nevertheless, there are some indications that the rate is falling. Recent data suggests that the fares will grow moderately higher than the previous time, and about one -third of the shelter costs account for the consumer price index. The ongoing wage increase is another inflation pressure.
Also read: It is easy to guess why Trump has given up talking about inflation
Then is the business policy of President Donald Trump. It remains to be seen whether tariffs will prove to be durable, but the current policy will probably give rise to some retail price hike. Even if most tariffs are removed or never installed, manufacturers will think twice before the construction of additional economic bridges for Canada and Mexico. Over the next few years, it will give rise to high cost and eventually high prices.
In addition, the Federal Reserve cut interest rates in 25 basis points in December, a decision that now looks wrong. This is more likely than reducing inflation pressure.
Of course, many of these problems occur before the Trump administration, so even though Trump changes courses on certain policies, there are already many basic speeds. In any case, Trump’s current plans are not well suited to fight stability.
One of Trump’s economic advisors, Kevin Husset suggested that the opposing-explosion plan was a low total demand and increased labor supply, but it is unlikely to succeed. The US is already close to complete employment, and the low total demand can increase or intensify a recession.
And it has become difficult yet. Trump is a long fan of low interest rates and easy wealth, for example, and a landscape is that he tries to apply his will on the fed, leading to high inflation rates.
A more potential result, but still bad for inflation rate, is that real or danger Trumpian intervention makes the central bank more difficult to manage. This can limit the capacity of the Fed to reduce the inflation rate in a serial manner. Fed predicability and reliability is very difficult to establish in the current environment.
Also Read: Mint Quick Edit | Trump vs. Powell on US Fed Policy
What about unemployment? There is a consensus that the labor market has been widely stable, but is slowing down on work and people are less likely to quit their jobs. The overall condition appears more weak. Meanwhile, the global geopolitical order is frightening, and the current policy uncertainty can damage the possibilities for domestic investment. While I am optimistic about economic possibilities for artificial intelligence, progress can be bumpy rather than smooth.
If you accept the notion that inflation is more likely to grow more than falling, and that the labor market is likely to deteriorate more than improvement, the possibility is due to a minor stagnation.
Many comments predicted destruction when the inflation rate increased to 8.9% after Covid and the fed had to disintegrate. Still the stagflation did not come, perhaps because the Fed and its policy was so reliable and expected. It is difficult to expect the same today.
Good news, if it is the correct adjective, it is that it is likely to be one of the Gentler staples in history. But how would voters react to high inflation, especially when Trump campaigned by promising to end inflation and won in part? The opportunity for policy mistake seems especially more. Trump can also consider a mixture of corporate sacrifices and a mixture of wages and value control, as Richard Nixon did.
Also read: Jonathan Levin: Trump has removed the possibility of inflation that now harasses his chairmanship
The widespread reality is that the macroeconomic policy, no matter what the President is, does not provide many useful equipment for beating stagflation without inspiring the recession. A lot of macroeconomic advice either has to reduce or increase the overall demand, nor will not solve all the problems in solving all the problems of those decisions.
So is it time to panic? No, it is not time to panic. But this may be a time to consider going into a state of high emotional anxiety. © Bloomberg