That ’70s Show: Can Stagflation Return?

The 1970s, which “Doonesbury” comic strip artist Garry Trudeau once called “a kidney stone of a decade,” was the time of stagflation—low economic growth and high inflation.

Lately, some are worried that stagflation will recur, and soon. JPMorgan Chase & Co. Chairman and CEO Jamie Dimon has been predicting that for the past several months. JPM’s chief market strategist, Marko Kolanovic, echoed his boss in a report, saying “there is a risk of the narrative turning back from [G]oldilocks toward something like 1970s stagflation, with significant implications for asset allocation.”

Slower consumption data of late threatens to bring stagflation’s return and thwart a soft landing of the economy, contended InterActive Brokers’ chief economist, Jose Torres.

U.S. economic growth is hardly roaring, but it is positive, in low single digits at 2.5% last year. The most recent Consumer Price Index, for January, was 3.9% annually (the CPI for February is due out Tuesday), down from a 9% rise in June 2022 but proved “sticky”: reluctant to descend further toward the Federal Reserve’s 2% goal.

According to an analysis from State Street Global Advisors’ chief investment strategist, Michael Arone, “stagflation is a low probability outcome today. But after the harmful monetary, fiscal and trade policies of the past two decades, a bout of stagflation isn’t totally farfetched.”

Rising protectionism and geopolitical conflicts all have inflationary potential, Arone warned. He pointed to a study from Strategas Asset Management, which found that a second wave of U.S. inflation starts, on average, 30 months after the first peak. The nation is 21 months past the June 2022 peak in CPI.

Gross domestic product bounced back after its 2.2% slide in 2020, when the pandemic started. The U.S economy shot up 5.8% in 2021 and then downshifted: 1.9% in 2022 and 2.5% in 2023, with a Bloomberg economists’ survey projecting 2024’s GDP at 1.4%.

The Federal Reserve’s hesitation to cut rates is a drag on GDP growth, Arone observed, and consumer sentiment polls are mixed.

The consensus lately is for an economic soft landing, in which inflation is tame and a recession is avoided. But Arone noted that recent predictions have turned out to be wrong, and hence the current thinking may be, as well.

“How many investors anticipated the treacherous market performance in 2022 or the surprisingly pleasant rebound in 2023?” he wrote. “Most investors predicted a recession last year that never happened.