It happened in the 1970’s and it wasn’t fun. Are we setting up for repeat of Stagflation?
“Stagflation” has definitely been raised as a possibility. If it comes back, the Misery Index (unemployment rate + inflation rate) will surge.
Based on targeted 200,000 Federal layoffs, and many private layoffs taking place at this time, I think unemployment will go up in 2025.
Personally, I’m torn about inflation. Tariffs are inflationary, sending labor back home outside of the US is inflationary… but a recession is disinflationary. In the last month the 5-year US TIPS bond breakeven inflation rate has declined from 2.6% to 2.5%. It’s not always right, but it’s an unbiased real-time indicator about how market participants with skin in the game are viewing inflation over the next five years.
I think recession is a real possibility in 2025, but not a certainty, and inflation? Who knows. But a slowdown in 2025, really, really likely. A stock market bust worse into -20% bear market? Likely.
Historically stagflation came about for these reasons:
- Government policies, like hindering industrial output and tampering with the money supply.
- Supply shocks, like a sharp increase in energy and/or commodity prices.
- High unemployment.
All of those things appear to be a real possibility.
Hard to predict what will happen. I am concerned about some unforseen disaster – a natural disaster, another pandemic, an attack… We are not prepared to deal with such disasters, especially if relevant departments are being shuttered.
In ~2018, the global pandemic response team was downsized and supposedly spread out into other departments. Bottom line - we were unprepared for the pandemic.
I fear the same for a future unforseen disaster.