Key Takeaways:
- Stagflation risks persist, says analyst, despite CPI decline.
- Expert says the absence of competition and rising unemployment might propel stagflation.
- The stock market will respond negatively despite its year-to-date rally.
YEREVAN (CoinChapter.com) – Stagflation is an economic state typically characterized by a sluggish economy, high inflation, and high unemployment. Unlike periods of inflation, stagflation sees higher prices persist, despite slowing economic output.
Why is stagflation still a threat despite CPI at 4%?
In detail, the Federal Reserve carried out ten consecutive interest rate hikes in the previous year to fight inflation. As a result, the consumer price index (CPI) cooled to 4% in May, according to the latest report by the Bureau of Labor Statistics. The easing prompted Fed Chair Jerome Powell to skip the intended interest hike in June, albeit mentioning a possible hawkish continuation this year.
Meanwhile, the economic conditions are still difficult for policymakers to manage. Powell has to walk a thin line between staving off inflation and triggering a rise in the unemployment wave. Meanwhile, Chartered Financial Analyst Michael A. Gayed agreed that stagflation remains a threat.
The problem is hard to solve long-term in the absence of competition. Competition ultimately solves inflation while keeping unemployment low. It doesn’t look like that’s going to happen for now, all while jobless claims are just starting to pick up.
mentioned the analyst.
The analyst added that the economy today exhibits signs of stagflation as it did in the ’70s, the last occurrence of the phenomenon. “Although unemployment rates are currently low, they could potentially rise if economic growth continues to slow, and at a much faster rate of change than inflation dropping,” reported Gayed.
Meanwhile, persisting stagflation risk could also reverse the stock market’s 16% year-to-date rally.
Stock market under threat, experts believe
The US stock market index S&P500 gave a choppy performance year-to-date but advanced 16% since its downturn last year, up over 20% off its low from last October. The index reached nearly 4,410 ahead of the June 20 session, breaking crucial resistance inspired by Congress’s passage of the debt ceiling deal.
At the same time, the Dow Jones index has gained 3.5%, and the Nasdaq Composite has risen 30.8%.
However, recent acceleration foreshadows some pain ahead, experts predict.
“The market is behaving pretty delusionally,” said Amanda Agati, chief investment officer at PNC Financial Services Asset Management Group. “Much of what’s going on right now may very well be that it’s sort of the last hurrah, the last gasp before we tip into contraction.”
Despite some bullish signs in the market, a sustained rally seems unlikely — especially considering a possible recession still looms. Moreover, the 2-year and 10-year Treasury yields remain inverted, a phenomenon that has historically preceded economic downturns.
Amanda Agati also mentioned the upcoming interest rate hikes as another challenge for stocks. “We think the Fed will take another step to tighten policy further in July, and that may ultimately be the catalyst that creates a market correction,” she said.
Also read: Tesla Golden Cross Iminnent as TSLA Stock Rises 120% in 2023.
However, Sylvia Jablonski, chief executive, and chief investment officer of Defiance ETFs, remained bullish, despite expecting some short-term pain ahead.
I think that we’re likely to end the year up versus down. However, I don’t necessarily think we’re going to get another 20%, 30% or something like this out of the Nasdaq.
mentioned the expert.
