Stagflation fears come back with a vengeance

foxbusiness.com:

QI Research CEO and chief strategist Danielle DiMartino Booth discusses whether stubbornly high inflation data will delay Fed rate cuts on «Making Money.»

Some Wall Street strategists are growing concerned the U.S. economy could be headed toward a 1970s-style stagflation scenario amid recent signs of stubbornly high inflation and a cooling economy. 

A string of inflation reports during the first three months of 2024 all came in above estimates, fueling fears that inflation could prove more difficult to conquer than previously believed. On top of that, economic growth during the first quarter unexpectedly faltered, rising at an annualized pace of just 1.6% – the slowest rate since 2022.

«This was a worst of both worlds report: slower than expected growth, higher than expected inflation,» said David Donabedian, chief investment officer of CIBC Private Wealth US, of the latest GDP data. «The biggest setback is the acceleration in core inflation, and in particular, the services sector rising above a 5% annual rate.»

That combination of economic stagnation and high inflation is what's known as «stagflation,» which is regarded as a worst-case outcome for the Federal Reserve.

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The phenomenon ravaged the U.S. economy in the 1970s and early 1980s as spiking oil prices, rising unemployment and easy monetary policy pushed the consumer price index as high as 14.8% in 1980, forcing Federal Reserve policymakers to raise interest rates to nearly 20% that year. 

Stagflation fears surged in 2022 as the Fed began aggressively hiking interest rates to quell raging inflation, but those mostly dissipated last year amid signs that price pressures were subsiding without a