– Pair of economic reports suggest risk of stagflation
– Concerns arise due to inflation rise and growth stall in the US economy
– Experts suggest hedging risk with adjustments to investment portfolio allocations and remaining cautious about potential future developments
Recent economic reports have raised concerns of stagflation, a term used to describe when inflation rises while economic growth stalls. The US economy experienced this dangerous combination with a significant slowdown in first-quarter GDP growth and higher-than-expected personal consumption expenditures, favoring the Federal Reserve’s inflation metric. This resurgence of the stagflation debate has investors concerned, drawing parallels to the problematic economic conditions of the 1970s.
While some analysts like LPL Financial’s chief economist Jeffrey Roach are not yet classifying stagflation as their base case scenario, others like Mike Reynolds of Glenmede note a growing concern for stagflation risks. Discussions about additional rate hikes by the Federal Reserve and warnings from Wall Street figures like JPMorgan CEO Jamie Dimon are increasing awareness of potential economic challenges. Roach and Reynolds suggest that higher rates could have consequences by 2025, particularly as the government and businesses face rolling over debt with high rates.
To mitigate risks of rising inflation and potential stagflation, Reynolds recommends going underweight on equities and increasing exposure to fixed income. However, overexposing oneself to duration could pose risks, as future inflation could impact long-dated assets. Alternative investments could offer some protection in case of disappointment in bonds or equities, according to Roach. For now, the threat of stagflation remains a distant possibility, and future reports or GDP revisions could alleviate these concerns. Bank of America, for example, pushed back against the stagflation narrative, citing no clear signs of such a scenario.