Is America Teetering on the Edge of a Stagflation Crisis?

Financial experts are warning that stagflation, the dreaded condition which afflicted the United States in the late 1970s, could now be a real possibility for the U.S. economy.

In a recent interview with The Associated Press, JP Morgan CEO Jamie Dimon said he is remaining “cautious” about the American economy, warning that the worst of inflation and possibly the onset of stagflation could still be ahead. “I’m just a little more dubious than others that a soft landing is a given,” he said.

“Stocks are very high,” Dimon continued, “and I think the chance of inflation staying high or rates going up are higher than people think… My view is whatever the world is pricing in for a soft landing, I think it’s probably half of that.”

Stagflation occurs when an economy experiences both stagnation and inflation simultaneously. Specifically, it is characterized by high inflation, high unemployment, and stagnant demand.

Stagflation is particularly problematic because the traditional tools used to combat inflation, such as raising interest rates, can exacerbate unemployment and slow economic growth further. Conversely, measures to reduce unemployment and stimulate growth (like lowering interest rates or increasing government spending) can worsen inflation.

Stagflation last occurred nearly 50 years ago, when various factors, including oil price shocks and poor fiscal policy, drastically increased costs for businesses and consumers while also slowing economic growth. In 1975, inflation reached 10 percent, while the unemployment rate topped nine percent.

At the time, most economists believed stagflation was impossible. To finally solve the crisis, Fed chair Paul Volcker raised interest rates to 20 percent, bringing inflation down but sending the country into a deep economic recession. The results of stagflation played a significant role in sinking the re-election bid of President Jimmy Carter and ushering in the Reagan Revolution.

Currently, inflation has cooled from 9.1 percent in June 2022 to 3.5 percent in April, but remains stubbornly high due to runaway government spending. Unemployment is also low at 3.8 percent, but there are some indications that figure may be misleading, like the growing number of people who have been forced to take two or more jobs to make ends meet and the escalating trend of people simply dropping out of the workforce altogether and not looking for a new job.

Slowing GDP growth has added to stagflation fears. According to government data, first-quarter economic growth this year fell well behind estimates, rising at an annualized rate of just 1.6 percent, below forecasts of 2.5 percent. David Donabedian, chief investment officer of CIBC Private Wealth U.S., described that finding combined with high inflation as a “worst of both worlds report.”

As Business Insider has pointed out, while lower than expected GDP growth typically “bolsters calls for interest rates to start easing, the report noted a hotter-than-expected rise in consumer prices as well. That puts serious limits on the Federal Reserve’s ability to take action, as the central bank has made clear it needs inflation to climb lower before any rate cuts can happen.”

But given that Biden and congressional Democrats have shown no signs of being willing to curb spending, inflation is not likely to come down anytime soon. With the average interest rate for a 30-year fixed mortgage still above seven percent, Americans also can’t expect borrowing to become cheaper, either.

Adding to the toxic mix of economic conditions, Americans are also falling further behind on their credit card payments, creating another potential crisis scenario. A recent Federal Reserve Bank of New York report warned that 8.9 percent of credit card balances are currently delinquent. The report also found that one in five cardholders has exhausted at least 90 percent of their available credit.

As NPR notes, “Overall credit card balances totaled $1.115 trillion in the first quarter of the year, $129 billion more than last year.” Meanwhile, “44 percent of borrowers carry record card debt over from month to month.”

With wages continuing to be outpaced by inflation, more and more Americans will have to borrow money to keep up with costs. This means they’ll be borrowing at heavier and heavier interest rates, which will only plunge them deeper into debt. If enough people slip into default, it could lead to a domino effect like the country saw with the subprime mortgage crisis in 2007, triggering a complete recession.

Fed Chair Jerome Powell has insisted there is “no sign” of stagflation ahead. And indeed, conditions do appear better today than they were in the 1970s. But the refusal of Biden and Democrats in Congress to take the necessary measures to stabilize the teetering economy could soon result in rapid deterioration and ultimate collapse into stagflation.

While Americans can’t be sure about the country’s economic future, one thing they can count on is Biden continuing to blame Republicans for the problems the president himself created. As reported by Axios, the Biden administration recently “released a memo to its allies outlining its actions to combat rising costs — and blaming Republicans for blocking its efforts.” The memo makes the case that the only reason Biden has failed to do more to curb inflation is Republican obstructionism.

However, polling data shows that significantly more Americans trust Trump than Biden to handle the economy and inflation. If stagflation does indeed set in, it will likely spell political doom for Biden.

Andrew Shirley is a veteran speechwriter and AMAC Newsline columnist. His commentary can be found on X at @AA_Shirley.