The famous economist Nouriel Roubini had long been warning about the risk of stagflation in the US and the rest of advanced economies. The cocktail of stimuli (monetary and fiscal), vigorous recovery and limited supply could lead to a rise in prices (inflation) much higher than real GDP growth. This phenomenon, which the New York University professor predicted in the medium term, could be taking place in the US.
Inflation could stay above 5% for a while, while economic growth could have peaked. “Until recently, I had put the focus more on medium-term risks. But now it can be argued that ‘mild’ stagflation is already underway. Inflation is rising in the US and many advanced economies, and growth is slowing. slowing down drastically, despite massive monetary, credit and fiscal stimuli, “says the expert in an article published in Project Syndicate .
There is now some consensus on the causes of slower growth in the US, China, Europe and other major economies: This loss of traction is the result of supply bottlenecks in labor and goods markets. “The optimistic turn from Wall Street analysts and politicians is that this mild stagflation will be temporary and will last only as long as the supply bottlenecks last,” says Roubini.
In fact, there are multiple factors behind this mild summer stagflation. On the one hand, the Delta variant is temporarily increasing production costs (small confinements and restrictions), reducing production growth and restricting the supply of labor.
Workers, many of whom still receive high unemployment benefits due to expire in September, are reluctant to return to the job market, especially now that the Delta variant gains more steam. On the other hand, people with children may need to stay home due to school closings and a lack of affordable childcare services.
On the production side, Delta is disrupting the reopening of many sectors and launching a new torpedo into global supply chains, ports and logistics systems. Shortages of key inputs, such as semiconductors, are further hampering the production of cars, electronics, and other consumer durables, driving inflation. It seems like a perfect storm that shouldn’t last too long in principle.
“Still, optimists insist that this is all temporary,” Roubini emphasizes. But what if this optimistic view is wrong and stagflationary pressure persists beyond this year? When does it stop being a temporary or transitory phenomenon? How many months does inflation have to be above the Fed or ECB target to be considered a problem?
For now, “core inflation, which excludes volatile food and energy prices, is likely to remain close to 4% by the end of the year. Macroeconomic policies are also likely to remain flexible, judging from plans for stimulus from the Biden administration and the likelihood that the weaker eurozone economies will run large fiscal deficits even in 2022. And the European Central Bank and many other advanced economy central banks remain fully committed to continuing unconventional policies throughout much longer, “explains the economists.
Although the Fed is considering reducing its bond purchases, the net purchases are likely to stick around for a while. Furthermore, Roubini believes that the Fed, “like most central banks, has fallen into a debt trap due to the increase in public and private liabilities (as a percentage of GDP) in recent years. Even if inflation slows down. remains above expected, exiting QE too soon could cause the bond, credit and equity markets to collapse. That would subject the economy to a hard landing, which could force the Fed to reverse its decisions and resume QE. “.
Furthermore, Roubini is convinced that negative supply shocks will persist in the medium and long term. The expert lists a long list of factors that can limit global production and continue to push prices upwards: “The trend towards deglobalization and increased protectionism, the balkanization and relocation of distant supply chains and the demographic aging of economies Advanced and Key Emerging Markets Tighter immigration restrictions are hampering migration from the global south to the overall richer north. The Sino-US Cold Warit is just beginning and threatens to fragment the global economy. And climate change is already disrupting agriculture and causing spikes in food prices, “says Roubini.
Furthermore, the political backlash against income and wealth inequality is prompting tax and regulatory authorities to implement policies that strengthen the power of workers and unions, setting the stage for strong wage growth. Although Roubini does not detail these trends, the truth is that some examples such as increases in the minimum wage or the Rider Law can be seen in Spain, while other countries adopt similar measures.
“While these persistent negative supply shocks threaten to reduce potential growth, the continuation of expansionary monetary and fiscal policies could unleash inflation expectations. The resulting spiral in prices and wages would usher in a medium stagnant environment. a term worse than that of the 1970s, when debt-to-GDP ratios were lower than they are now. For this reason, the risk of a stagflationary debt crisis will continue to lurk in the medium term, “the expert says.