Get ready for stagflation light.
Headlines about stagflation are everywhere, and the “flation” part of the equation is pretty obvious. February’s consumer price index arrived this past week, and it was as bad as expected. The CPI rose 7.9%, up from 7.5% in January, while core CPI, which strips out food and energy, rose 6.4%, up from 6%. And the University of Michigan Index of Consumer Sentiment pointed to the highest inflation expectations since 1981.
We’re having a harder time seeing the “stag” part, at least if the expectation is for a 1970s-like malaise. Back then, prices were soaring, growth was anemic, and jobs were being lost. For now, there’s little sign of that, despite the steep inflation rate. Just 227,000 people lost their jobs this past week, a level that is near the postpandemic low, and, quite frankly, muted for just about any period.
Growth is certainly slowing, but it may be holding up better than it seems. The Atlanta Fed’s GDPNow tool is a favorite of those who fall in the stagflation camp. Right now, it’s putting first-quarter gross-domestic-product growth at just 0.5%. This number is computed based on a model that’s updated with each new data point. Where it stands now isn’t guaranteed to be where it ends up.
“The models are tracking near zero growth due to a base effect resulting from strong growth in 4Q21 and less than one month of Omicron impaired 1Q22 data,” explains Ironsides Macroeconomics’ Barry Knapp. “This is not stag anything.”
Other measures suggest the possibility of much stronger growth. Morgan Stanley economist Julian Richers notes that the firm’s GDP tracking model estimates first-quarter growth at 2.9%, while its Nowcast puts growth at 7%. Once again, these are models with their own quirks, ones that make 7% growth unlikely but perhaps better than 0.5%.
That could be good news for the stock market. UBS strategist Nicolas LeRoux notes that monthly returns from U.S. stocks decline to 1.03% from 1.22% when inflation is high and the economy decelerates from high to medium growth, though returns turn negative when it drops into the low end of its historical range.
Investors looking for some stagflation insurance could look to the
Global X Lithium & Battery Tech
ETF (ticker: LIT). The fund, whose positions include lithium miner
(ALB) and electric-vehicle maker
(TSLA), tends to benefit when inflation expectations are rising and growth expectations are slowing, says Huw Roberts, head of analytics at Quant Insight. The ETF’s companies might also be long-term beneficiaries from rising oil prices as consumers look for alternatives.
“Historically oil shocks sow the seeds for the next round of innovation,” he explains.
Write to Ben Levisohn at [email protected]