Stagflation: An Inescapable Reality

Even if a recession is not formally acknowledged, the combination of stagnant growth and high inflation reflects a situation known as stagflation. This condition has been evident throughout the first half of this year.

The Consumer Price Index (CPI) for June is set to be released early next week, and estimates suggest an increase of about 0.8% in prices, pushing the annual inflation rate close to 9%. This marks the highest inflation rate since 1981. The stagnant economic conditions coupled with soaring inflation signify a clear stagflation scenario.

Currently, there are around 11.3 million job openings while less than 6 million individuals are unemployed. Consequently, we are unlikely to see a significant rise in the unemployment rate during this recession; instead, we can expect a sharp decline in job openings. This figure has already dropped from a peak of 11.9 million in April to 11.3 million in June.

While a slight uptick in unemployment might be perceived as a positive indicator, it poses challenges in managing inflation. This situation necessitates that the Federal Reserve maintain an aggressive approach to interest rate hikes for the remainder of this year and into 2023.

Should the unemployment rate rise as it typically does during recessions, personal income would likely decline, leading to reduced demand in the economy. This, in turn, would exert downward pressure on prices and alleviate inflation.

Historically, increases in unemployment during recessions have effectively and swiftly curtailed inflation. However, in this instance, high inflation is likely to persist well into 2023. Continuous interest rate hikes from the Fed will further entrench stagflation, resulting in minimal economic growth alongside elevated inflation rates that exceed the Fed's targets.

At this juncture, the current administration has limited options for addressing the situation. Efforts to stimulate demand for growth could inadvertently escalate inflation, while measures aimed at reducing demand to lower inflation will impede growth.

A Viable Solution: Supply-Side Economics

To effectively tackle both inflation and sluggish growth, government policy should focus on enhancing total supply. Such an approach would bolster output, facilitating economic recovery from recession and alleviating inflationary pressures. Unfortunately, the current administration appears hesitant to adopt supply-side strategies, opting instead for policies that may inadvertently decrease overall supply.

Implementing supply-side policies could involve reducing taxes to foster capital availability for expansion and streamlining regulations to ease business growth. Conversely, the Biden administration continues to impose new regulations that hinder business expansion. Additionally, the administration's inclination to diminish capital formation, coupled with rising public debt, could lead to a scarcity of capital in financial markets, significantly hampering growth in a capital-intensive economy.

Recently, Democrats unveiled a proposal to increase taxes on the wealthy to fund Medicare initiatives. Such tax increases would diminish savings among the wealthy and further stifle capital formation.

In summary, while the economy is stagnating (and possibly contracting) amid soaring inflation, the silver lining is that the impending recession is anticipated to be relatively mild.

The first video discusses the recent downward revision of 818,000 jobs in the labor market, highlighting implications for economic growth.

The second video examines the August jobs report's shortcomings and explores Wall Street's reactions to the economic data.