With higher inflation this year and continued “higher” unemployment, some are worried that stagflation, a term coined in the 1970s may be back.
JP Morgan, one of the Portfolio Strategists we utilize for client accounts, wrote on that very issue today which I share below…
After two consecutive disappointing monthly jobs reports, rising wages and inflationary pressures that look more persistent than expected, worries are mounting that the U.S. may be entering a period of “stagflation.” The term is often used to describe the 1970s, when economic conditions were characterized by high unemployment and high inflation. Economists quantified this situation by compiling the “Misery Index,” which takes the sum of the unemployment and inflation rates.
However, the Misery Index is nowhere close to its levels in the 1970s. We also don’t have the “stag” in stagflation. The overall labor market recovery has been robust and economic growth is set to be remarkably strong this year, despite a temporary delta-driven slowdown. While union power was an important driver of the wage-price spiral in the 1970s, the decline in union membership and the impact of globalization make this kind of wage-price spiral unlikely. While supply chain strains may keep inflation elevated well into 2022, we do expect inflation to moderate toward the Fed’s 2% target and for growth to regain steam in the first half of 2022.
As investors regain conviction, cyclical equities should re-take the baton from more defensive sectors. Nevertheless, we expect inflation in this expansion to be significantly higher than the last long expansion, presenting an opportunity for active management to select the companies most protected from these headwinds and levered to the growth trends of this economic cycle.