Reflation vs Stagflation

11/22/21
 
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from Maudlin Economics,
11/22/21:

I spoke with Constance Hunter in New York her KPMG team pulls together a chart book with loads of data on where the economy is heading.

Key Points:

The inflation outlook depends on the relationship between high prices and wages, and whether pandemic-related factors will keep workers sidelined.

Long-term demographics suggest a persistent demand headwind, but the current demand surge could keep prices elevated into 2022.

Growing employment is not consistent with a “stagflation” scenario.

The pandemic affected labor supply for in-person occupations which, combined with structural supply changes, could keep wages elevated.

Faster wage growth will likely boost real GDP growth because not all wage increases will be passed through as higher prices.

Productivity growth would help real wages grow at an even faster pace, and also be less of a drag on profit margins.

Bottom Line: While acknowledging similarities to the 1970s, the KPMG team doesn’t see the current inflation inflicting that kind of long-term damage. They believe the Fed can engineer a “dovish tightening” that curbs demand but keeps policy accommodative. They are also optimistic that higher productivity will allow faster growth without boosting inflation too much. A positive, but well-reasoned scenario.

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