The market is growing increasingly worried that the U.S. economy could be headed for stagflation, which is categorized by high inflation, high unemployment, and slowing economic growth. In fact, several banks (including Goldman Sachs) already believe stagflation is here.
Lawrence Summers, former U.S. Treasury secretary, also wrote in a recent op-ed column in The Washington Post that he thinks the Fed is sailing toward a period marked by recession and stagflation. Here are three simple charts that can help you monitor the U.S. economy in terms of stagflation.
Image source: Getty Images.
1. Consumer Price Index
The Consumer Price Index (CPI) measures the price increases and decreases of a basket of goods and services that Americans use on a daily basis. As you can see in the chart, the CPI is up close to 8% on a year-over-year basis as of February, which is the highest increase in about four decades. The three-year average annual increase of the CPI is 4.3%.
The Federal Reserve doesn't always use the CPI as its main gauge of inflation, but it's hard to deny what the numbers are telling us here. Soaring gas prices from Russia's invasion of Ukraine have only made matters worse. Yes, I think it's fair to say that the U.S. has found itself in a time of high inflation. The Federal Reserve has already begun raising its benchmark overnight lending rate and is expected to do so several more times this year, with the goal of reining in inflation.
2. Unemployment
Image source: Federal Reserve.
Stagflation also includes high unemployment. Right now, that doesn't seem to be the case, however. The unemployment rate in the U.S., which measures the number of people without a job as a percentage of the overall labor force, spiked up to close to 15% during the early stages of the pandemic. But since then, it's fallen below 4% in February.
Some economists believe the U.S. is at or very close to full employment, in which essentially all those who are willing and capable of working are employed. Wages have risen over the past year, although not as high as the CPI. But just because unemployment is still low, it doesn't mean that it won't rise in the near future. In his op-ed column, Summers said he believes average unemployment and inflation will rise above 5% in the coming years.
3. Gross domestic product estimates
Statista chart showing U.S. GDP historically
Last but not least, the third piece of the stagflation equation is economic growth, which can be measured by looking at gross domestic product growth in the U.S. between 1990 and 2020. U.S. GDP growth hardly ever cracked 3% from 2000 onward (3%-plus is considered strong economic growth for the U.S.). In 2020, due to COVID-19, GDP fell 3.4%. In 2021, as the economy rebounded from the pandemic and GDP grew at an annualized rate of 5.7%.
This year, however, GDP growth estimates have been slashed several times, and the Fed now expects the economy to grow less than 3% this year, which still isn't terrible considering the U.S. economy has averaged 1.8% GDP growth over the past 22 years.
Is the economy suffering from stagflation?
Based on unemployment still being quite low and GDP growth still hard to predict, it doesn't seem like the economy is necessarily experiencing stagflation based on the most recent data we have.
But that doesn't mean that couldn't change quickly, and many experts now see it as a distinct possibility. Unemployment may yet rise, and growth projections for the economy could change many more times before 2022 is over.
That said, things could also take a positive turn. Perhaps the Fed can navigate a soft landing as it raises interest rates and reduces its balance sheet. It's hard to tell exactly what will happen next, but use these three charts to monitor the situation.
