Ed Peters
March 9, 2022

We’ve been discussing the possibility of stagflation as far back as June 2020, but it always seemed more of a remote threat. With the Ukrainian conflict, however, it’s quickly becoming a very real possibility. As we also said in October, this bout of stagflation will be different than last time.

Like the last time, the high cost of oil may be the tipping factor. But unlike the late 1970s, we have shortages all through the economy due to supply chain issues. Globalization is on a much larger scale now than before. So the problems in one part of the global economy will have knock-on effects in another. For instance, the automotive industry was already struggling to produce new vehicles due to a global chip shortage. Now, European automakers are having even more problems because most of their wiring arrays are manufactured in Ukraine. As a result, many automotive plants in Europe have been shut down as a direct result of the Ukrainian conflict.

Global growth is likely to take a hit as producers deal with this type of issue in both raw and manufactured materials. Businesses have a level of inflation-related pricing power that we haven’t seen in decades, so prices will rise at the consumer level even as growth slows. As the conflict in Ukraine goes on, it is likely that we will continue to see slower growth and higher prices. Add into the mix higher interest rates from the central banks, then stagflation, the rarest of economic states, is likely to be back. If GDP growth stalls, but the money supply continues to expand at a rapid pace, then the current supply/demand inflation could soon morph into monetary inflation. Monetary inflation is a much more difficult type of inflation to contain, as we saw in the late 1970s. While this may sound like a rerun of those days, inflation will probably not reach the levels it did a generation ago. And that’s good news.

Past performance is no guarantee of future results. Potential for profit is accompanied by possibility of loss.
© First Quadrant, LLC, 2022. Intended for Institutional and Qualified Eligible Persons Use Only. The views expressed are the views of First Quadrant, LLC, only as of the date shown and are subject to change without notice based on market and other conditions. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice, recommendation, or solicitation of any particular security, strategy or investment product. This publication has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information, you should consider its appropriateness having regard to your objectives, financial situation or needs. It is your responsibility to be aware of and observe the applicable laws and regulations of your country of domicile. All material has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission.

Related Posts