What does stagflation mean and what Biden can do about it

Some warn that the Federal Reserve’s efforts to slow inflation may return the US economy to the unusual state in which it found itself during the 1970s and early 1980s: stagflation.

The Big Picture: Despite the high rates of inflation, the US economy is progressing rapidly The unemployment rate was 3.6% in April – close to the lows last seen in the late 1960s.

What is stagflation?

Stagflation describes a very unusual economic situation when the economy is weak or recession – With unemployment high or high – yet inflation is also high.

  • This is the opposite of what usually happens.
  • High inflation tends to appear when economic growth is really rampant.
  • Periods of weak economic growth and rising unemployment are usually accompanied by slow price increases or even price falls.
Do we have stagflation right now?

no.

While the annual pace of price increases has jumped to a 40-year high in recent months, unemployment is incredibly low. This is an inflationary environment, not stagflation.

Data: FRED, Graph: Axios Visuals
Data: FRED, Graph: Axios Visuals
When was the last time we experienced stagflation?

The most famous stagflation hit the United States in the 1970s and early 1980s, when a series of oil shocks – especially Ban 1973 Arab OPEC members have put on the US in response to Israel’s military support – driving up fuel costs and inflation, while unemployment has risen at the same time.

The combination of energy shocks and stagflation continued intermittently in the early years of the Reagan administration. In late 1982 unemployment was hovering around 10% and prices were rising up to 6% annually.

So why talk about stagflation?

A number of prominent figures in economic policy — former Federal Reserve Chairman Ben Bernanke, current Fed Chairman Jerome Powell, and Treasury Secretary Janet Yellen (who also led the Fed) — have recently suggested either implicitly or explicitly that while the Fed is trying to bring down inflation, And unemployment is likely to rise.

It probably means that we will have an economy that is kind of in stagflation, at least for some time. In other words, growth will weaken, but inflation will remain high.

what are they saying?
  • Treasury Secretary Janet Yellen Wednesday: “The global economic outlook is challenging and uncertain, and rising food and energy prices have inflationary effects accompanied by stagnation, i.e. reduced production and spending and increased inflation worldwide.”
  • Bernanke In the New York Times Article published this week: “Even under the benign scenario, we should have a slowing economy…and inflation is still very high but it’s going down. So there has to be a period in the next year or two where growth is low, unemployment is at least a little bit higher and inflation is still high. ”.”So you can call that stagflation.”
  • Powell He told the Wall Street Journal, This week: “I would say there may be some pain involved in restoring price stability.”
What could Biden do about stagflation if it did happen?

Not much would be politically unpalatable.

  • Biden could propose a sharp cut in spending on the federal deficit. This may help reduce inflation, but it is likely to hurt growth and raise unemployment.
  • can try A type of wage and price controls imposed by President Nixon in 1971although this seems highly unlikely and not particularly effective.
  • He can basically let the Federal Reserve handle it. This is the path Jimmy Carter took in the late 1970s. Soaring interest rate increases by the Federal Reserve and the deep recession that followed contributed significantly to its elimination in the 1980 presidential election.

Bottom line: As we said above, we don’t have stagflation yet. The Fed would probably be able to control the needle so perfectly that inflation goes down easily and unemployment goes up slightly and no one notices.

  • But stagflation is a possibility, and one that is not attractive to practically everyone.

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