Brent $119.57 down $2.10; WTI $118.91 up $3.04.
From OilPrice, May 30:
- Stagflation, a government’s worst nightmare, is the combination of high inflation, high unemployment, and slow or negative economic growth.
- Several analysts and economists are downplaying the threat of stagflation due to relatively low levels of inflation and confidence that inflation is temporary.
- In reality, the EU’s plan to ban Russian oil just as demand is set to climb could cause an economic shock that would cause an economic situation not seen since the 1980s.
The war in Ukraine has highlighted the depth of global connectivity and interdependence, exposed the energy security of Europe, and put the post-Pandemic economic recovery in doubt. However, one of its most important contributions has been to accelerate the post-Covid legacy that is rising inflation. Rocketing energy prices and reports of multiple countries facing a cost-of-living crisis are becoming increasingly difficult to ignore. The real question of the day, however, is centered around whether or not are we heading for stagflation, a policymaker's worst nightmare. And when it comes to the question of stagflation, there are few factors as important as the EU’s plan to ban Russian oil.
Stagflationary fears are gaining ground, with more than 70 percent of investors expecting an "economic storm". Even the Treasury Secretary, Janet Yellen, used the term in one of her comments. It should be made clear that there are technically no strict parameters for exactly what stagflation is. There are people, such as New York Times journalist Paul Krugman, who believe that while inflation is a big problem, we are unlikely to see a return to the 1980s. If, when one talks of stagnation, they mean that inflation will persist along with a moderate rise in unemployment, we might be headed towards stagflation, but that isn’t a 1980s-level of stagflation.
The above argument focuses largely on inflation expectations. In 1979 - 80 the inflation rate was 9 percent, and it wasn’t until the subsequent oil price shock that the whole situation was exacerbated. The Fed had to raise interest rates into double digit territory, culminating at 20 percent, which was followed by a recession. Inflation did fall, but unemployment increased, and in 1982 it still stood at a whopping 9.7 percent (it stands at 3.6 percent today).
But such a scenario seems unlikely today. Krugman compares today with the economic situation of 2008 when there was also a recession and unemployment. However, the only difference was that inflation did not persist for as long as it did in the 1980s. This is corroborated by a recent survey released by the Federal Reserve bank of New York that shows consumer expectations regarding inflation spiking in the shorter and near term but subsiding after three years at 3 percent. If this continues to hold true, which will only be possible if there isn’t any new shock to the global economy, then Krugman’s thesis will hold true....
....MUCH MORE
