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Questions on Stagflation

May 27, 2022

We are often asked whether the US economy is headed toward a “stagflation” cycle. But what exactly is stagflation? Is that where the economy is headed? Hear what ITR is forecasting in the latest episode of TrendsTalk with ITR Economist and Speaker Lauren Saidel-Baker.


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The below transcript is a literal translation of the podcast audio that has been machine generated by Rev.

Hi, I'm Lauren Saidel-Baker, and thank you for joining me for today's episode of ITR Economics TrendsTalk.

Today we're answering a listener question. It's a common one out there. It's about stagflation. I'm sure you've heard this buzzword before, and I'm sure you're hearing it a bit more now. We certainly are. We're getting a lot of questions over whether the US economy is headed for stagflation. So let's pull that question apart.

First, what is stagflation? And secondly, is that where the US economy is headed in the near term? So the easy answer is no, we do not expect to be headed toward a stagflation cycle. So what does stagflation really mean? Well, it's a portmanteau. The first part, stag, comes from stagnant or stagnation in the economy. And we don't see that happening. We expect further growth in the domestic economy on both the industrial side, as well as the broader GDP measure. So by that we mean no recession, no significant pullback in economic activity. Yes, our economy is in a slowing growth phase of the business cycle, but everyone hears that and they just focus on the first word. Slowing. Fewer people focus on the entire concept. That second word is still growth. We do still have positive growth rates, positive rates of change across both our industrial economy, across our GDP, our broader level of economic activity, and we don't expect that to change.

So the recovery, 2021 we saw very rapid rise, a very robust recovery. It brought us to some quite high growth rates. Those were never sustainable. We never expected accelerating growth to continue indefinitely. That just isn't how economic cycles tend to work. So slowing growth was really a natural consequence. We had to see that pull back, that come back down to earth to those more sustainable more, well, hopefully manageable for many businesses in those growth rates going forward.

So slowing, but still positive growth. That's the first side of the equation. But back to our favorite buzzword, stagflation. The second part is regarding inflation. And I agree, inflation rates are incredibly high right now. We have some multi decade high 40, 50 year high measures, depending on exactly which inflation metric we're using, both across the producer price index, consumer price index, various different price indices. So yes, inflation is currently very high, but if you've seen our forecast, you'll know that we don't expect this rapid and increasing pace of inflation to last too much longer. We're very close to the peak of that cycle. So disinflation is in our not too distant future.

By the end of this year, we should see disinflation across both producer and consumer prices. Let me be clear. I am saying disinflation, not deflation. So we don't think price levels are going back down, but we do think they're due to rise at a slightly slower and slowing rate. What that means is that prices will still be increasing, but this rapid rebound, this surge in price levels that has us all so bothered, that's largely behind us. And indeed, the fundamental drivers that drove inflation so high, many of those factors are not repeated. They're now starting to taper off.

So I hope we've answered that question. Stagflation. We've taken down really both sides of the equation. To be absolutely clear, no. We at ITR expect disinflation going forward and more moderate, more sustainable, but yes, slowing rates of growth. So let's make stagflation what it is. A fun buzzword, a very interesting historical case study, but not our immediate future here in the US.

Thank you so much for joining me today for this episode of ITR Economics TrendsTalk. I'm Lauren Saidel-Baker. Let's talk again soon.


Since 1948, we have provided business leaders with economic information, insight, analysis, and strategy. ITR Economics is the oldest privately held, continuously operating economic research and consulting firm in the US. With a knowledge base that spans six decades, we have an uncommon understanding of long-term economic trends as well as best practices ahead of changing market conditions. Our reputation is built on accurate, independent, and objective analysis.