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Stagflation without stagnation?

Market Insights 08.11.2021

Market Insights

November 8th, 2021

The economic concept most in vogue recently has been that of “stagflation”, a term describing mounting unemployment (STAG-nation) and surging prices (in-FLATION). The reference case is that of advanced economies in the 1970s, a period of huge monetary turbulence and oil shocks. This situation creates a dilemma. Is it better to boost income and employment at the risk of stoking inflationary tensions, or to counter the overheating at the risk of plunging the economy into recession? The experience of the 1970s suggests that there is no middle way (fine tuning) and that the only effective cure is to tighten monetary policy sharply. Is this the problem faced today? Here is some background: activity and global trade have rebounded faster than anyone expected after the Great Lockdown. The divergence between the V-shaped profile of demand and the U-shaped profile of supply has been accentuated by low inventories. This is resulting today in widespread shortages that are driving up prices and, in some cases, wages. It is also leading to a drop in unemployment and an acceleration in capital expenditure to create additional supply capacities. In short, inflation is clearly present, but not stagnation. The pace of economic growth is set to slow in 2022, either because the recovery loses momentum (in the US and Europe) or in a bid to curb over-indebtedness (China). In contrast, there is no clear evidence to claim that inflation rates will continue rising.


Table of forecasts


Sources: Consensus forecasts, MF, OECD, ODDO BHF Securities






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