FX.co ★ Fears over US stagflation mount

Analysts are once again sounding an alarm on the future of the US economy. A combination of elevated inflation and slower economic growth is raising fears of a stagflation scenario.

Concerns came after the US GDP report for the first quarter showed economic growth coming in well below economists' expectations, thus disappointing investors. Even data indicating that US consumer prices picked up failed to reassure market participants. According to Business Insider, such readings suggest that stagflation is looming. This phenomenon is considered to be worse than a recession because it is more difficult to remedy. Economic stagflation cannot be corrected through interest rate cuts, experts point out.

The last time the United States experienced stagflation was in the 1970s. It was a turbulent time for the economy. So it is not surprising that economists and market participants are raising alarm bells, trying to avoid any sort of repeat of this gloomy scenario.

Notably, the US economy grew at an annualized rate of 1.6% in the first quarter of 2024, falling significantly short of the consensus forecast of 2.5% and down from a solid 3.4% in the fourth quarter of 2023. As expected, the market reaction to US GDP data was negative and triggered a broad sell-off in stocks.

In this situation, the US Federal Reserve will be forced to cut interest rates as soon as possible, analysts assume. At the same time, the regulator needs to gain confidence that inflation is falling before it starts to ease monetary policy.

Further signs of slowing economic growth and rising prices will indicate the onset of stagflation, a condition that combines stagnant economic growth with persistently high inflation.