Will higher inflation lead to stagflation? Not likely in the U.S

DEWITT, Mich. - March 15, 2022 - PRLog -- It is not surprising that inflation has been top of mind for most investors given the escalation of the crisis in Russia/Ukraine, and the subsequent upward pressure on energy and food prices, at a time when inflation was already elevated around the globe. The question has now become whether elevated inflationary pressures will ultimately lead to slower growth or even a recession here in the U.S. In our view, while inflation may lead to slower growth in the U.S., we still do not see an economic downturn on the horizon.

How high can inflation go?

This past week we saw CPI inflation in the U.S. for February reach yet another 40-year high, coming in at 7.9% year-over-year¹. This was driven by higher headline inflation, given higher energy and food prices, as well as by higher core inflation, as shelter and rent prices continued to climb higher.

Keep in mind that this inflation figure is backward-looking and does not fully account for the recent move higher in oil prices. For example, WTI crude oil averaged $92 for the month of February¹. Thus far for March, the average price of WTI is $112¹. Given the upward pressure from higher oil prices alone, we see headline CPI inflation remaining elevated for the month of March, potentially moving toward 8% to 10%¹.

The situation in Russia/Ukraine continues to remain a human tragedy first and foremost. For the sake of this commentary, our views and analysis focus on the financial market implications to help our clients navigate this geopolitical crisis.

The crisis in Russia/Ukraine has exacerbated inflationary pressures globally on many fronts over the past three weeks. Not only have we seen higher oil and gas prices, but also higher wheat and grain prices, as well as some further disruption to supply chains, particularly in base-metal commodities like palladium, which are used in auto manufacturing.

However, if any de-escalation occurs in the war over the next few weeks – which still remains a largely unknown and fluid situation – we could see some of the energy, food and commodity prices rapidly reverse, and, of course, a primary overhang will be lifted on markets globally. More broadly, this crisis may spur more supply of oil to come online, in the near term and over the longer term, through any number of channels across the globe. We may already be starting to see some of this being priced into markets, as WTI this week fell to around $108, after reaching recent highs of around $125¹.

Source: 1. FactSet