How Real Are Stagflation Risks?
The financial media has jumped on the narrative that stagflation risks (elevated inflation and stagnant growth) are rising, and that’s one of the reasons stocks have declined over the past week and a half. More directly, concerns are growing that the administration’s policies (namely tariffs and tax cuts) will actually promote stagflation by firming inflation and restricting growth. But while sentiment surveys are reflecting this concern, as we and others have shown, there are legitimate reasons to be skeptical of the conclusions in these surveys given the intense divisions and opinions by either side of the political spectrum.
Put bluntly, people’s view of the administration is likely impacting their future view of the economy and while that can become a self-reinforcing phenomenon, the best thing to do in times like these is to stay focused on actual data because that will tell us if growth is truly slowing.
So, how real are stagflation risks? So far, it's not that real. First, there’s not a lot of economic “stagnation” out there. Yes, jobless claims rose to 242k, but that’s still very low, historically speaking, and certainly not a level that implies a slowing economy. January retail sales and the February flash PMIs were soft, too, but there are legitimate reasons to wait for more confirmation before reading too much into those reports (awful winter weather). However, many other economic metrics remain solid, including Durable Goods and the flash manufacturing PMIs.
Bottom line, some data has been disappointing vs. expectations but it’s a long way from implying the “stagnation” we see in “stagflation.” Similarly, the “flation” isn’t really there, either. Yes, inflation expectations have surged, but as we showed last week that appears to be impacted by political party affiliated, with Democrats expecting a huge jump in inflation and Republicans expecting virtually none. Recent inflation reports have been firm (including CPI), but it’s not running away, and Friday’s Core PCE Price Index declining solidly to 2.6% is a reminder that while there are some upticks in inflation, it’s far from conclusive.
Bottom line is this pullback in stocks is a combination of policy volatility impacting investor sentiment (that is undeniable and this decline is a self-inflicted wound by the administration) and investors worrying about what could happen in the future, not what’s actually happening now. If Trump were to back off tariff threats tomorrow, the talk of stagflation would evaporate because there’s no proof of it in the data yet—just the risk that it may appear due to potential policies.
The takeaway for us from this dynamic is clear: Watch the data. That’s especially true this week because we get the three most important economic reports of the week via the ISM Manufacturing and Service PMIs and the Jobs Report. They will provide a major update on inflation and growth and at that point, we’ll have a much better idea if these fears of stagflation are backed up by data.
Bottom line, the administration’s chaotic and unorganized communication process is leading investors to both extremes. If you support the administration, you likely think the brightest economic days are ahead. If you don’t, you think these policies will lead us into 1970s-style stagflation. Those opinions are impacting the markets and overshadowing actual data in the short term. But beyond the short term, it’s the data that will decide it. You can count on us to stay focused on the data and tell you if it’s confirming investor fears (and correction chances are rising) or refuting them (which means this is a buying opportunity).
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