Higher prices at the gas pump and grocery store combined with decreasing consumer confidence have some market analysts sounding the alarm for "stagflation"—but it's too early to make the call.
The last time the U.S. was in major stagflation—a period of very high inflation rates and slower real economic growth—was from 1965 until 1982, according to the Council on Foreign Relations. In that period, the "poster child for perfect-storm stagflation" was from the first quarter of 1974 to the last quarter of 1982, noted Brian Henderson, chief investment officer at BOK Financial®.
"It was the energy crisis in 1973 that created the inflationary shock in 1974, which ultimately put us in recession," Henderson said. "The stock market went nowhere but outperformed bonds. Gold and real estate performed very well. Another oil crisis shock occurred in 1979, with even higher inflation in 1980, and a recession followed as the Fed slammed on the brakes."
Many of those elements—energy crisis, inflation, well-performing gold and real estate—likely sound familiar right now, even to those who are way too young to have seen Saturday Night Fever in theaters. Nevertheless, we're not in stagflation—at least not yet, experts say.
U.S. job market and consumer spending still strong
"Stagflation, as defined, is high inflation along with increasing unemployment. We've got high inflation, but we don't see unemployment increasing at the present time. The job market still looks very strong," explained Steve Wyett, chief investment strategist for BOK Financial.
U.S. unemployment edged downward to 3.8% in February, with widespread job growth in leisure and hospitality, professional and business services, health care and construction, according to data from the U.S. Department of Labor. The labor force participation rate was at 62.3% in February, changing little from January.
However, the volume of job openings outnumbered the number of unemployed people once again, with 11.3 million openings and 6.3 million unemployed individuals.
"Job openings are very high. There's still some room for the labor force participation rate to improve, so there's still some sense we can continue to get job growth as we move through this year," Wyett said.
In addition, consumer behavior will be a key factor in keeping stagflation at bay, Wyett said. At the end of 2021, expenditures for personal consumption made up 68% of U.S. gross domestic product (GDP). And consumer spending remains strong: expenditures for personal consumption increased by $337.2 billion, or 2.1%, in January, according to the U.S. Department of Commerce.
That's despite the fact that "consumer confidence has been falling for a while," Wyett noted. "It's been interesting: consumer confidence has not been good, but consumers have been spending. Retail sales have been strong, so their spending patterns haven't really matched what we're seeing in the consumer confidence numbers."
Gas prices could be stagflation trigger
Consumer confidence hit its lowest levels in nearly 11 years this month. This drop comes amid ongoing inflation and Russia's invasion of Ukraine, which is resulting in equity market volatility and rising gas prices.
On March 11, the average U.S. price of regular-grade gasoline reached a record-high $4.33 per gallon, according to AAA national gas price data. That number exceeds the previous record high of $4.14 set in July 2008. Adjusted for inflation, the July 2008 gas price becomes $5.37, which today's national average price for regular-grade gas has not yet hit.
However, consumers are spending less of their income on gas now than in 2008 because incomes have increased so much, Wyett agreed. "To get that same level of stress, gas prices would have to hit $5 a gallon." Regular-grade gas prices have reached—and even exceeded—the $5 mark in some states, such as California, but the national average is still below that level.
If gasoline rises to that price or higher nationally and consumers consequently reduce their spending, stagflation might occur, he said. "At that point, it's just going to come down to consumer response. Higher gas prices could be the proverbial straw that breaks the camel's back."
How Fed reacts to mitigate inflation will be key
It's not just gas prices that are being affected. Together, Russia and Ukraine make up nearly 30% of the world's wheat exports, so the war between the two is resulting in record-high wheat prices, which could impact the price of wheat-dependent goods such as bread and feed-dependent goods such as meat.
However, experts agree the conflict between Russia and Ukraine is still contributing to U.S. inflation, which was already high. One variable going forward will be how the Federal Reserve reacts to quell it. Wyett predicts there will be six—and probably even seven—rate increases this year.
"We are possibly realizing the benefits today of a central bank that learned lessons from the 1970's period of stagflation," Henderson added.
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