Stagflation Increasingly Likely With War, Stimulus to Blame
When consumer prices started soaring in 2020-21, commentators began expressing concern that stagflation — a combination of stagnant economic growth and inflation — might be coming.
Inflation is already high, with consumer prices jumping 7.5% in the 12 months through January, an almost 40-year high.
The economy grew 5.7% in 2021, but the worry is that a series of interest rate increases by the Fed will stifle growth. The Fed has indicated it will begin lifting rates this month.
Former Treasury Secretary Lawrence Summers says people are right to be worried about the possibility of stagflation. The Russia-Ukraine war and the after-effect from excess government stimulus in 2021 could help ignite stagflation, the Harvard professor told Bloomberg.
“We’re now facing real risks of a 1970s-type scenario,” he said. “Not quite as high levels of inflation as we saw in the 1970s, but the same kind of broad phenomena of stagflation.”
Inflation reached double digits in that decade.
What Could Be Next?
The war will likely worsen inflation, some economists have predicted, thanks to the surge in oil and other commodity prices. That could hurt the economy, as consumers lose more of their income to paying for products that include those commodities, such as gasoline.
What Summers views as unneeded government aid to the economy also could fuel inflation, he said. Summers has cited the $1.9 trillion pandemic-relief bill, passed in March 2021, as too large.
The Fed needs to raise rates aggressively to quell inflation, Summers said. But that could endanger the economy, he said.
“Monetary policy is an effective tool but it may not be an effective tool without engineering a slowdown,” Summers said.
It’s entirely possible that “without a significant slowdown in the U.S. economy, we’re likely to have inflation be unanchored two years from now,” he said.
