Stagflation?
An increasing number of economic forecasters are digging up a word not used since the 1970s: Stagflation.
Stagflation - high inflation with weak economic growth - is one of the most confounding economic environments for policy makers. The problem with stagflation is that the standard economic relationships no longer apply, and standard levers to affect economic change - monetary and fiscal policy - break.
I don’t know if we will actually experience stagflation, but the current global supply chain damage appears to suggest a risk. Due to closed ports, labour shortages and production halts in early 2020, the world is short of everything. Coupled with surprisingly strong demand from the well-supported consumer, this is translating into much higher prices.
We’re already seeing much higher prices for raw materials, such as oil, copper, cotton and food, with commodity prices beating equity and bond indices.
Shortages aren’t limited to commodities, as similar stories play out across finished goods producers and even service industries (where there is a shortage of labour). For example, auto dealer inventories are far below normal levels, driving up prices for new and used cars.
While supply shortages pressure prices, surging consumer demand is abating - potentially dragged down by higher prices. In a normal economic environment, demand destruction usually slows inflation, but this is not necessarily the case in a stagflationary environment in which prices are rising due to supply shortages.
I assume the supply chain will eventually get repaired and production increase, as workers return to work and bottlenecks are reduced. However, chronic underinvestment and exogenous shocks (e.g. crop destroying heat domes) suggests ongoing energy and food supply challenges.
So the questions remain: when will production return to normal, what industries will return to normal and how much will a loaf of bread cost by the time?