Introduction to the Inflation Concerns
The economic landscape of the United States is facing a significant challenge, with inflation concerns drawing parallels to the 1970s and ’80s. Economist Torsten Slok has identified an uncanny resemblance between the current inflation trends and those of the past, suggesting that the U.S. economy may be heading towards another "inflation mountain." This phenomenon is characterized by rising inflation and inflation expectations, driven by factors such as tariffs, dollar depreciation, and disagreements within the Federal Open Market Committee (FOMC) on how to balance inflation with employment.
Warning Signs Emerge
Slok’s analysis is supported by a chart that juxtaposes the current path of U.S. core CPI with inflation periods from 1974 to 1982. The chart illustrates a close similarity between the inflation wave of 1973/1974 and that of 2021/2022. If this pattern holds, the economy may be due to scale another peak starting in the fall of 2025. The "first inflation mountain" refers to the initial spike in inflation, while the "second mountain" represents the even steeper climb that followed several years later, driven by external shocks and policy missteps.
Mounting Inflation Fears
These warnings are not new, as Slok has previously argued that Jerome Powell’s choice of words at the Jackson Hole Symposium suggested that the Fed sees structural distortions from tariffs and immigration policy. If these forces keep inflation sticky and Powell cuts rates, Slok wrote that he could be vulnerable to a 1970s-style "stop-go" policy mistake, which could lead to the painful corrective measures seen under Powell’s predecessor, Paul Volcker. In such a scenario, a premature loosening of policy could lead to a spike in inflation, resulting in severe corrective measures.
Recent Inflation Data
The most recent inflation read, the Personal Consumption Expenditures index, showed prices rising 2.6% in July compared to the previous year. Excluding food and energy categories, prices rose 2.9%, up from 2.8% in June and the highest since February. This data suggests that inflation is becoming increasingly sticky, with a pullback in spending in discretionary categories. The broader Consumer Price Index was flatter than expected at 2.7%, while the Producer Price Index was higher than expected, with wholesale prices rising 3.3% over the same period.
Recession Risks and Stagflation
These warnings come as economists debate the shape of the back half of the 2020s, questioning whether a recession is ahead or the "stagflation" that accompanied the inflation mountains of Slok’s analysis. UBS sees an elevated recession risk from the hard data from the U.S. economy, coming in at 93% in July. JPMorgan was alarmed at July’s shockingly soft jobs report, saying that a slide in labor demand of the magnitude shown in July’s jobs report "is a recession warning signal." Mark Zandi, chief economist for Moody’s Analytics, has warned that the U.S. is on the precipice of a recession, citing much of the same hard data as UBS.
Conclusion
In conclusion, the U.S. economy is facing significant inflation concerns, with warnings of another "inflation mountain" on the horizon. The current inflation trends are drawing parallels to the 1970s and ’80s, with rising inflation and inflation expectations driven by factors such as tariffs and dollar depreciation. As economists debate the shape of the back half of the 2020s, it is essential to consider the risks of recession and stagflation, and the potential consequences of policy mistakes. The recent inflation data suggests that inflation is becoming increasingly sticky, and it is crucial to monitor the situation closely to avoid a repeat of the painful corrective measures of the past.
