Stagflation, caused by high inflation, a stagnating economy, and rising unemployment, is one of the most difficult economic conditions to emerge from. The reality for the United States is that it may already be here.
The United States is no stranger to stagflation, though. For nearly a decade beginning in 1974, unemployment remained above 6 percent while prices increased by at least 5.7 percent every year. Several of those years saw the CPI inflation rate in double digits. In addition to causing widespread misery, stagflation is long-lasting and problematic for the government to fight.
If the economy grows too quickly, there’s a risk of inflation and rising prices. If the economy grows too slowly, there’s a risk of recession with rising unemployment. However, these two situations have relatively simple responses. The Federal Reserve generally raises interest rates while the government aims to reduce spending. To counteract a recession, the Fed lowers interest rates, and the government spends money to inject cash into the economy.
Stagflation is considered more problematic because it’s characterized by both rising prices and rising unemployment. If the Fed raises interest rates, as it has over the past several months, there’s a risk of increasing unemployment. If the government spends money, there’s a risk of inflation. The current skyrocketing prices are due, at least in part, to the $1.9 trillion stimulus plan the Biden administration unleashed on the nation in March 2021.
In March 2022, U.S. inflation was 8.5 percent, a 41-year high. It slowed to 8.3 percent in April but is still more than four times the U.S. inflation target of 2 percent. The inflation rate doesn’t include the cost of gasoline, which has increased by more than 30 percent, home heating oil, now up by more than 76 percent, and food, which is up 9.4 percent year-on-year. Consequently, most Americans are experiencing the worst inflation of their lifetime.
Meanwhile, unemployment is only 3.6 percent, which is just a little higher than normal; however, this figure is misleading. The unemployment numbers do not consider lost clients and lost wages by freelancers and the self-employed, the reduction in hours for hourly workers or loss of a second job, which some families depend on to make ends meet. A large percentage of workers have not returned to the office, which means that the income of restaurants, dry cleaners, taxis, haircutters, and other vendors who serviced them has not returned to pre-pandemic levels. However, service industry workers are technically considered employed as long as they turn up for work.
Retailers are facing the uncertainties of consumer buying habits, worker retention, and supply chain disruption, all of which are eating into their bottom line. This is also not reflected in the unemployment statistics. Additional exclusions include people who have given up on looking for a job and are now doing work online, regardless of whether they are earning enough to live on or not. Workers are considered employed if they work one hour per week. This means that skilled professionals who are now relegated to working the dinner rush at McDonald’s for three hours per day at minimum wage after losing their lucrative jobs due to two years of lockdowns are considered employed.
Regardless of what the legal definition of unemployed is, or what is or is not counted in the inflation rate, the simple reality is that things are dramatically more expensive than they were a year ago, and Americans are earning less. The median income of lower-income families has dropped by 3.0 percent, and the median income of middle-income households has decreased by 2.1 percent.
Going into 2022, it was expected that money from the government stimulus paired with pent-up demand from the COVID lockdowns would result in increased demand this year. It’s debatable whether this effect took place or not, but even if it did, it was temporary. Now, the realities of rising labor costs, a labor shortage, soaring input prices, growing transportation costs, and supply chain disruptions are setting in.
Instead of a surge, the economy is slowing with the GDP shrinking in the first quarter of 2022. Many corporations are complaining that their supply chains are still disrupted and that this is inhibiting their ability to produce and deliver products. Other corporations are reporting contracting sales, which could be attributable to a number of factors.
Pepsi reported a jump in revenue at the beginning of 2022. This revenue increase may have been largely due to price increases of as much as 12 percent. Companies are concerned that if costs continue to rise, they cannot pass the additional costs on to consumers in the form of higher prices because consumers may already be tapped out. As a result, the Dow Jones Industrial Average Index has been trending, more or less downward, since Jan. 4 as has the S&P.
To end the stagflation of the 1970s, the incoming Fed Chair Paul Volcker was forced to take some dramatic steps. He increased interest rates to nearly 19 percent in 1981, causing serial recessions in 1980 and 1981–82. In the end, he managed to kill the stagflation beast, but the average American was collateral damage. Similar painful adjustments may be necessary over the coming months.
Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.