There is fear and apprehension that the 1970s economic troubles that haunted the American economy are making a comeback with high inflation, high unemployment, and low growth. The combination of low growth and high inflation has been christened ‘stagflation’. And it has become an ominous buzzword about American market analysts, according to a Reuters report. Consumer prices grew by 5.1 per cent in September, growth this quarter is expected to fall to 2.7 per cent from 6.7 per cent of the previous quarter, and the $5.3 trillion fiscal stimulus since the start of the pandemic has led to higher commodity prices and to inflation. The Federal Reserve has been keeping the interest rest rates near zero level, and banks have been buying bonds from the market. There is the expectation that if inflation persists, it would be necessary to raise interest rates and taper bank spending on buying bonds. The banks have been buying bonds worth $120 billion every month. But according to Fed assessment the interest rates would not be raised before the end of 2022.
According to a Bank of America Global Research, fund managers expecting stagflation have risen to 14 percentage points, the highest since 2012. Louis Navellier, chief investment officer at Navallier and Associates is quoted as saying, “Clearly the deceleration in our economy is shocking and that points to stagflation.” It is being recalled that rising oil prices, unemployment and loose monetary policy pushed up the consumer price index to 13.5 per cent and the Fed Reserve had to raise interest rates as high as 20 per cent in 1980. There are many who believe that the fears of stagflation are exaggerated, that inflation caused by supply shortages will get settled and that the growth rate would improve.
Many of the economists surveyed by the Reuters early this month were divided on when the Fed would raise the interest rates. Quite a few believe that it could be as early as next September, while many of the economists think it would be only in 2023. James Knightley, chief economist at ING, is quoted as saying, “Unfortunately, we doubt supply-chain issues and labour shortages will be resolved quickly, so inflation would remain elevated through 2022. Given this situation, we expect interest rate rises in September and December next year.”
The Fed’s challenge seems to be that of stabilising inflation while achieving maximum employment, which is considered a difficult task. Growth and rise in employment naturally feed into inflation, and it is argued that rise in inflation accompanying rise in growth is accepted. But unemployment rate remains considerably high in America, and it is estimated to hover between 3.6 per cent and 4.7 per cent into the second half of 2023. President Joe Biden’s infrastructure legislation involving federal spending of more than $3 trillion is expected not to fire inflation because it is spread over many years, and it will not be spent in a year.
The stress in the American economy will have an impact on the world economy in many ways. A slow growth would mean that America would absorb less of the external trade, and many countries depend on their exports to America for foreign exchange earnings which are crucial for their own internal growth. A buoyant America also means that it will accept greater number of immigrants from developing countries seeking employment in America. It is axiomatic now that the global economy is more integrated than it was ever before, and trouble in one part will have ripple effects in other parts. America being the largest economy, its internal turbulence has a greater impact in the rest of the global economy.