LIVE MARKETS-Stagflation fears are floating about, but just how real are they?

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STAGFLATION FEARS ARE FLOATING ABOUT, BUT JUST HOW REAL ARE THEY?

Consumer sentiment has plunged over the last couple of months amid all the market volatility, and headlines around tariffs and layoffs.

With this the dreaded notion of stagflation is now in the air. Indeed, the University of Michigan consumer sentiment survey saw an alarming surge in inflation expectations recently, with one-year ahead expectations jumping to 4.9% and 5-year ahead expectations to 3.9%:

"5-year ahead expectations typically should be more stable, but this is the higher than anything we’ve seen over the past decade, including in 2022 when inflation was actually running really hot," writes Sonu Varghese, global macro strategist at Carson Group.

Varghese admits that this increase in inflation expectations would typically be very concerning for the Federal Reserve, but, he says other surveys don’t show a similar surge, including the New York Federal Reserve’s consumer survey and the Atlanta Fed’s business expectations survey. This he thinks is a big reason Fed Chair Powell was quick to dismiss concerns about rising inflation expectations.

Varghese also notes that The University of Michigan survey is also heavily influenced by politics with Democrats expecting big jumps in inflation, while Republicans are showing little concern at all.

In any event, Varghese's view is that we are far from stagflation.

"Anytime the specter of stagflation comes up, or even a surge in inflation, there are a couple of key things I look at: oil prices and wage growth," he says.

According to Varghese, energy price shocks (like in the 1970s, or even in 2022) tend to drive upside inflation shocks and right now, with oil prices hovering at the bottom end of their 4-year range, there is nothing like that.

The other thing in a stagflationary scenario would be wage growth running much hotter than it is. Instead, Varghese says the latest payroll report showed wage growth running close to its pre-pandemic trend.

This is why he says Powell argued that the labor market was not a source of inflationary pressure.

Of course conditions can change, but, as stands, these are some of the reasons Carson Group is choosing not to step foot in the stagflation camp.

(Terence Gabriel)

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