Treas. Sec. Yellen warns: Stagflation

[WendyBG]

https://www.nytimes.com/live/2022/05/18/business/economy-new…

**Yellen warns price increases are causing global ‘stagflationary effects.’**

**By Alan Rappeport, The New York Times, 5/18/2022**

**BONN, Germany — Treasury Secretary Janet L. Yellen said on Wednesday that elevated food and energy prices are depressing both spending and economic output, creating what she called “stagflationary effects” all around the world.**

**Her comments, which came ahead of a Group of 7 finance ministers meeting this week, offered a downbeat assessment of the global economy at a moment when nations are facing significant headwinds.**

**Ms. Yellen suggested that the United States was well placed to withstand the turbulence, pointing to America’s strong labor market and healthy household finances. ... “This is an environment that is filled with risks, both with respect to inflation, and also potential slowdowns,” Ms. Yellen said...** [end quote]

Most METARs will remember the stagflation of the late 1970s as a miserable time when prices rose at the same time that the economy stagnated. The stock and bond markets did poorly also. (Bond yields rose so the value of existing bonds fell.) Workers suffered since unemployment was high while prices rose. Retirees on Social Security suffered badly until the government started adjusting the benefits to inflation.

https://www.investopedia.com/articles/economics/08/1970-stag…
https://www.multpl.com/s-p-500-historical-prices
https://fred.stlouisfed.org/series/DGS10

Stagflation seems like a reasonable forecast, at least for the nearish term. In the U.S., the Federal Reserve will be forced to slow the economy to tamp down inflation. But inflation is not that easy to reverse, especially since the Fed’s moves don’t have a large or fast effect on consumer spending.

Wendy

[Notehound7]

Stagflation seems like a reasonable forecast, at least for the nearish term. In the U.S., the Federal Reserve will be forced to slow the economy to tamp down inflation. But inflation is not that easy to reverse, especially since the Fed’s moves don’t have a large or fast effect on consumer spending. [Emphasis added.]

Wendy,

I agree that we will experience stagflation - but independent of the Fed’s moves, I can think of two things that can or will have a large and fast effect on consumer spending, as follows:

1. Gas (petrol) prices. High fuel prices rapidly impact low-end consumers especially hard - those who buy essential items and consumer discretionary goods in Target, Walmart, Dollar General, etc.

2. IRA and 401(k) balances. Significant drops in stock and bond prices can impact middle-class aspirational consumers especially hard - those who book fancy vacations and name-brand discretionary goods in Nordstrom, Bloomingdales, Macy’s, etc.

My assessment is based more upon my own gut and emotional response to investment account statements. When others review their new balances, I can imagine thousands of “just barely rich” people discussing with their friends, partners, and children the necessity of cutting back on “wasteful spending.”

There is a corollary to “the wealth effect.” It’s “the reverse wealth effect.” The following excerpt from an article in the Washington Post explains how the reverse wealth effect can help to tame inflation:

Inflation is running at a 40-year high, and one of the few ways to cool the hot economy is to make everyone feel a little poorer — a trick known as the reverse wealth effect. In essence, that’s when stocks and other asset prices fall, prompting consumers to reconsider buying that car, dishwasher or trip to Hawaii. Many people won’t like it in the near term, but ultimately it can help restore a more healthy equilibrium between supply and demand and rein in the pace of rising prices.

https://www.washingtonpost.com/business/heard-of-the-fed-put…