New York
CNN
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For the previous few years, the US economic system has been rising at a tempo that appeared too good to be true.
So, at first look, Thursday’s gross home product report exhibiting the US economic system grew at an annualized rate of 1.6% within the first quarter of this yr versus the three.4% charge within the fourth quarter of final yr appears to be simply the drugs the Federal Reserve docs ordered. However there’s only one drawback: inflation.
The most recent Client Worth Index information exhibits inflation is rising, shifting additional away from the Fed’s 2% goal. And economists are forecasting new inflation information due Friday will paint an analogous image. The GDP report gave one other preview of what might come.
Included within the report was an replace on inflation from the prior quarter, as measured by the Fed’s most well-liked gauge, the Private Consumption Expenditures worth index. The most recent information confirmed costs ticked as much as a 3.4% annualized charge within the first quarter in comparison with 1.8% within the final quarter of 2023.
Slowing financial progress mixed with rising inflation is named stagflation. It’s among the many ugliest phrases to central bankers.
To be honest, one GDP report isn’t essentially indicative of a development. And on high of that, Thursday’s information is topic to 2 subsequent revisions, which might find yourself exhibiting the economic system isn’t slowing as a lot or in any respect. However even when the info doesn’t change, the US is by far better positioned than the UK and Germany, the place excessive inflation is coupled with practically nonexistent GDP progress.
Nonetheless, the most recent US GDP report isn’t a pleasing signal for the Fed — or traders, as evidenced by Thursday’s US stock market selloff.
Low charges of unemployment are inclined to compensate for a number of the ache that prime ranges of inflation convey. That’s as a result of companies usually can solely elevate costs when individuals are incomes sufficient to afford it. In distinction, when unemployment is excessive and individuals are chopping corners, companies can have a tricky time passing on increased costs to their clients, which retains inflation low.
One of many worst bouts of stagflation occurred within the Nineteen Seventies after a spike in oil costs from the Arab oil embargo on the US and different international locations that supported Israel within the 1973 Yom Kippur Battle raised the price of dwelling dramatically. However when the Fed tried to ease inflation by elevating rates of interest, the economic system fell right into a recession.
JPMorgan Chase CEO Jamie Dimon has issues that historical past might repeat itself.
The US economic system “seems extra just like the Nineteen Seventies than we’ve seen earlier than,” he stated earlier this week at a dialogue hosted by the Financial Membership of New York. He repeated that message in a Wall Street Journal interview revealed Thursday earlier than the GDP report was launched. “Issues seemed fairly rosy in 1972 — they weren’t rosy in 1973,” Dimon stated.
There are definitely eerie parallels to the Nineteen Seventies, with heightened geopolitical tensions within the Center East and rising oil costs, however many economists really feel the US is nowhere close to the scenario it confronted then. Even at its recent peak, inflation was properly beneath the excessive of that decade of practically 12%. On the present tempo, costs are rising much more slowly when in comparison with the Nineteen Seventies.
However the rising consensus amongst economists and funding strategists is that the times of the Goldilocks economic system, the place inflation was coming down with out slowing GDP, are numbered.
“Whereas the Goldilocks narrative has prevailed to this point this yr, in additional methods than one it’s as if she tripped over in the present day’s GDP report and scraped her knee,” wrote Mike Reynolds, vice chairman of funding technique at Glenmede, in a observe Thursday.