Concerns Over US Stagflation Are 'Unfounded'

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Junho Hwang] Recently, while inflation in the United States has shown a sharp upward trend, real economic indicators have slowed down, raising concerns about stagflation. Shinhan Financial Investment analyzed on the 20th that "unlike in the past, the US government and the Federal Reserve are not implementing inflation suppression measures, so the downward pressure on the economy due to policy failure is limited."

Since the third quarter of this year, concerns about stagflation have been raised in the US as real economic indicators slowed amid rapid inflation. While the economic growth forecast has been revised downward since July, inflation has increased by 2.3 percentage points compared to the beginning of the year. Due to supply chain disruptions causing a decrease in automobile production and the effects of disaster relief payments, consumer prices have continued to rise in the 5% range for three consecutive months, and core consumer prices have shown an increase of around 4%.

However, this situation differs from the stagflation experienced in the US during the 1970s and 1980s. At that time, in addition to the gap between inflation and indicators, accumulated inflationary pressures and government inflation suppression measures were contributing factors.

Although stagflation at that time is known to have been caused by supply shocks from the first and second oil shocks, a closer look reveals that the impact of accumulated policies before the shocks was significant. In the early 1970s, regulatory policies known as the Nixon Shock were implemented, and in the 1980s, Federal Reserve Chairman Volcker raised interest rates. The problem was attempting to control inflation through a demand curve approach. Combined with supply shocks such as rising raw material prices, this led to simultaneous economic recession and inflation. In contrast, in 2011, when there were no government inflation suppression measures, inflation centered on goods subsided, and service prices rose moderately at around 2%.

Heewon Kim, a researcher at Shinhan Financial Investment, analyzed, "This concern is expected to show a pattern similar to the economic flow in 2011," adding that "the misery index, which is the sum of unemployment rate and inflation, is lower than in the 70s, 80s, or 2011, and the current low level of capacity utilization with increased productivity suggests that supply expansion is easy. Therefore, the possibility of prolonged supply shocks is low."

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