Stagflation seems unlikely

Posted by: Paul Donovan

12 May 2022 2 min read
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Daily update

  • Yesterday’s US consumer price inflation fell a little less than expected. Details confirmed stagflation is unlikely. Stagflation occurs when an item’s inflation increases at the same time as demand falls. Stagflation requires a specific and significant policy response. Yesterday’s data showed that where demand fell, inflation slowed or turned to deflation.
  • If demand is rising, prices are rising. US airfares roared ahead, reflecting an ongoing desire to travel. UK credit card data showed similar trends. Higher oil prices and the depletion of savings are causing demand destruction—but post-pandemic people are still desperate to take holidays. It is a reminder that the past is an unreliable guide to the present. We live in interesting times, not normal times.
  • Crypto prices continued to plunge – were crypto a currency (it is not), it would be hyperinflation. Bursting bubbles removes theoretical wealth from bubble buyers. Crypto wealth losses affect too few people to be economically significant, and sensible players will have regarded it as a speculative gamble not an investment.
  • US producer price inflation for April is due. The UK has another attempt at guessing first quarter GDP—this data is before the tax grab hit the economy. There are more ECB speakers, as markets focus on the prospects of a July rate increase.

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