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Thursday, September 30, 2021
Once again, Wall Street is worried about slowing growth and relentless inflation.
In the wake of this week’s run up in oil, which coincided with energy crunches in China and the U.K., a certain word associated with slowing growth and higher inflation — popularized during a particularly rough stretch nearly 50 years ago — has begun to circulate.
The word you’re looking for? Stagflation.
Ever since soaring inflation — including crude prices (CL=F) — became the talk of the pandemic-era recovery, stagflation has been bandied about increasingly, especially as growth slowly came back down to earth from stratospheric levels post-lockdown. In Great Britain, gas lines reminiscent of the 70s have captured the public's attention.
Now, with extreme weather events like Hurricane Ida crimping energy supplies and cold weather looming for the Northeastern U.S., Brent crude is making a run at $80 per barrel — which, combined with spiking yields, has unsettled the market.
It’s also prompted a couple of Wall Street banks to make fairly aggressive oil price forecasts heading into year’s end. This week, Goldman Sachs shifted from “a cyclically bullish to a structurally bullish oil view” that caused analysts to hike its year-end forecast to $90 per barrel.
And given current trends related to COVID-19, that’s making some people nervous.
“The supply simply isn't there to fill the demand, and the fear becomes if there’s a harsh winter, there’s going to be harsh price spikes,” Bob Iaccino, Path Trading Partners co-founder, told Yahoo Finance Live on Wednesday.
With natural gas stocks already comparatively low and prices spiking alongside crude (which, incidentally, puts upward pressure on gas prices at the pump), “the government only has a certain amount of ability to mitigate those to the individual households,” Iaccino added.
To be certain, the economy — while undoubtedly slowing — is far from levels consistent with stagnation. The torrid demand that’s made both labor and supplies scarce shows no signs of slowing down anytime soon.
However, crude’s flirtation with $80 serves as a painful reminder that consumers are already paying more for everything, and fairly soon energy costs could be the final straw.
In an analysis this week, Capital Economics’ John Higgins wrote that the firm sees “a future in the U.S. in which inflation is significantly higher than it has been in the past decade, but still only moderately above target; economic growth remains healthy as supply constraints ease; and the Fed doesn’t press very hard on the brakes.”
However, economists have long warned that higher commodity prices act as a tax on consumers, which have been spending with near-reckless abandon. If they decide to tighten the purse strings, that could have grave consequences for the growth outlook.
“While our baseline view assumes that inflation will remain below 5% in most advanced economies...we think the risks to this view lie more to the upside than the downside,” Higgins noted.
“If inflation did rise materially above this level, we think it would start to jeopardize the outlook for economic growth and potentially prompt higher real rates, undermining the outlook for many assets,” the economist added.
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