What is it, and is the U.S. economy currently involved?

Federal Reserve Chairman Jerome Powell said Wednesday there are no signs of stagflation in the economy, although inflation remains stubbornly high and some signs of slowing growth have started to emerge .

In his remarks following Wednesday's release of the Fed's decision to leave interest rates unchanged, Powell said he didn't “really understand where the talk of a stagflation scenario was coming from” given the preponderance solid economic data.

Historically, stagflation occurs when high unemployment, slow economic growth, and high inflation occur at the same time.

Powell compared the current economy, with inflation and unemployment rates below 4%, to the 1970s, the decade when most economists consider stagflation to have taken root.

I don't see the deer, nor the 'flation,' Powell said.

So far, most economists agree with Powell's assessment. In a note to clients last week titled simply “No Sign of 'Stagflation,'” Bank of America analysts said the lower-than-expected first-quarter GDP report was primarily due to accounting reasons, not to a slowdown in underlying demand.

“Consumer spending (…) remains resilient,” analysts say, even if it is likely that it contributes to maintaining the right to inflation at a high level, they added.

“We believe that this point of view [of growing stagflation] is wrong,” they wrote.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, also said in a recent note to clients that despite weaker manufacturing data, fears of the US sliding into stagflation should be “ignored”, as given data showing a slow but steady slowdown in price increases.

“Stagnation in manufacturing production has not stopped the U.S. economy as a whole from growing at a very fast pace on average over the past two years,” Shepherdson wrote.

The U.S. economy today looks much better than it did in the 1970s, according to most data. This previous decade was marked by oil shocks that caused gasoline prices to soar, as well as a confluence of other factors, including the impact of the abandonment of the gold standard, more labor unions powerful people who could demand higher wages and reductions in government price control policies.

Whereas in 2024, wage growth has largely kept pace with inflation without exceeding it. And the pandemic's effect on prices of food and other goods has also largely eased.

Meanwhile, although interest rates are high, they are lower than they were 50 years ago.

When it comes to fuel prices, the average cost of a gallon of gasoline in 1974 isn't much different today on an inflation-adjusted basis.

In May of that year, it was 53 cents a gallon, the equivalent of $3.41 today, which is not far from the current average price, according to AAA: about $3.66.

At his news conference Wednesday, Powell said the central bank has “the luxury of strong growth and a strong labor market to keep rates at their current level, between 5.25% and 5.5 % to give inflation a chance to ease and has ruled out further rate hikes.” .

What is less clear is how long inflation will remain above the Fed's 2% target.

“It is primarily the safe-haven sector that is keeping monthly inflation increases high,” Moody’s economist Matt Colyer wrote in a note Wednesday.

“However, as the list of contributors has expanded to include things like auto insurance and health care, it becomes harder to ignore them. For this reason, the Fed will face an extended period of disinflation before announcing its first rate cut.

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