As the 12th day of Russia’s invasion of Ukraine treads on, the economic concerns brought on by the conflict are in focus. Stagflation is one of the greatest fears eating away at investors lately. As recession fears heat up amid global supply-chain hiccups and quickly rising oil prices, whispers of stagflation are swirling.
What do you need to know about recent talks of stagflation?
Well Russia’s attack on Ukraine has resulted in supply shocks across a number of industries, but especially oil. Russia is the second-largest producer of natural gas in the world. The Russia-Ukraine conflict, in addition to the steep economic sanctions levied against the former country, has forced the price of oil up more than 40% this year. While there is no universal consensus on what conditions cause stagflation, supply shocks are a main culprit. Many have begun suspecting supply shortages will result in a greater economic slowdown for months to come.
Stagflation is an economic condition marked by rampant inflation in conjunction with slowed economic growth and high unemployment. As you might imagine, stagflation is something every developed nation desperately hopes to avoid. The event can spell a nigh doomsday situation for a country’s economy as consumer spending dwindles dramatically. There have been several examples of stagflation in the world, with the most famous case being the Great Stagflation of the 1970s.
Over the last 60 years, the S&P 500 dropped a median 2.1% in quarters considered “stagflationary.” This is compared to a median 2.5% increase in all other quarters.
So, is stagflation imminent?
Investors Split on Stagflation Concerns as Oil Prices Loom Large
As the gap between the two-year and 10-year Treasury yields continues to shrink, recession fears have grown some legitimate thorns. Indeed, last Friday the yield curve approached its flattest value since March 2020. This was a sign to many investors that a recession may very well be on the way. Reasonably so, as inverted Treasury yields have preceded every U.S. recession since WWII.
In a Bank of America survey, 30% of fund managers believed stagflation would take root within the next year. This shows a steep increase over last month’s 22% figure.
The United States is in a particularly tricky circumstance. The Federal Reserve has planned on increasing interest rates to curb high inflation for the better part of a year. Indeed, last year consumer prices rose more than 7%, the highest inflation in 40 years. However, given the current geopolitical environment, many fear if the Fed increases rates excessively, it could induce greater unemployment and slow down the economy. This could create a perfect storm of conditions to give way to stagflation.
However, not everyone is as concerned over the potential for stagflation. Eric Merlis, managing director at Citizens Financial Group, remains confident in the U.S. economy. Recently, he said,
“The labor market recovery remains very robust across the board as more Americans are returning to work. Geopolitical issues and inflation pose ongoing threats to the U.S. economic recovery, but pandemic restrictions are being lifted and we continue to see strong job growth.”
The stormy cloud of stagflation continues to eat into investors’ collective psyche. Whether the rumors remain rumors, or the Russia-Ukraine conflict creates the circumstances necessary for stagflation to take root, remains unclear for now.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
