Stagflation Risk: Stephen Roach Latest Economist to Sound Alarm on 70s-Style Inflation

September 30, 2021 By Tom Ozimek ~

Stephen Roach is the latest high-profile economist to sound the alarm on the risk of a 1970s-style stagflation—where economic growth falls but inflation stays stubbornly high.

The former Morgan Stanley Asia chairman told CNBC in a Sept. 29 interview that the energy price spike is inflicting major damage to struggling supply chains and that he believes the United States is “one supply chain glitch” away from a 70s-era bout of stagflation.

His remarks came as gasoline stations were running dry in Britain, power costs were surging in the European Union ahead of winter, and amid rising prices for oil, natural gas, and coal.

In the interview, Roach spoke of supply chain bottlenecks shifting from one part of the supply chain to another rather than easing, a situation he called “strikingly reminiscent of what we saw in the early 1970s” and one that “suggests that inflation will stay at these elevated levels for longer than we thought.”

“We were sort of one supply chain glitch away from stagflation,” Roach said, adding, “That seems to be playing out, unfortunately.”

Roach took aim at the Fed’s easy money policies, arguing they were excessive, particularly in the face of persistent inflationary pressures.

While Fed officials have maintained that the current bout of inflation is temporary and will abate once supply chain dislocations abate, they have increasingly started to acknowledge that inflation has been stickier than previously thought.

“This is not the situation that we have faced for a very long time and it is one in which there is a tension between our two objectives. … Inflation is high and well above target and yet there appears to be slack in the labor market,” Federal Reserve Chair Jerome Powell said at a European Central Bank forum, with his remarks appearing to point to a stagflationary dynamic.

Surging prices have been a headline theme amid the economic recovery, rising faster than wages and eroding the purchasing power of Americans.

Core personal consumption expenditures (PCE) inflation, which excludes the volatile categories of food and fuel and is the Fed’s preferred gauge for price growth, has risen sharply in recent months, well above the central bank’s 2 percent target.

In April of this year, core PCE was 3.1 percent, rising to 3.5 percent by May and 3.6 percent in June and July, the latest months of available data from the Commerce Department.

While Fed officials have expressed concern about price pressures, they predict that the high rate of inflation is a transitory phenomenon. Still, they acknowledge there’s a risk that price pressures will be stickier than previously anticipated.

New York Federal Reserve Bank President John Williams said Monday that consumer expectations for what the rate of inflation will be several years down the road remain “well-anchored” around the Fed’s 2 percent objective, though he said there are upside risks and a “great deal of uncertainty” around the inflationary outlook.