Stagflation Spectre Haunts US Economy: Experts Warn On Slow Growth And Inflation After Fed Officials Float Rate Hike Ideas

The U.S. economy is on the brink of a dreaded period of stagflation, a scenario where inflation rises and growth stalls, according to two economic experts.

What Happened: The U.S. economy’s first-quarter GDP growth rate of 1.6% was significantly lower than the expected 2.5%, reported Business Insider. This is a worrying sign as it indicates a slowdown from previous quarters.

On the other hand, personal consumption expenditures, a key inflation metric, rose by 2.8% against a 2.7% consensus. This worrying combination of slower growth and rising inflation has reignited fears of stagflation.

Jeffrey Roach, the chief economist at LPL Financial, warned that investors may need to prepare for the resurgence of the stagflation debate. He pointed out that if stagflation were to take hold, it would not bode well for the markets.

“If you take [the] inflation report in conjunction with yesterday’s GDP report, I think what investors really have to start positioning themselves for is the resurgence of the stagflation debate,” said Roach according to the report.

Mike Reynolds, the vice president of investment strategy at Glenmede, also acknowledged the potential risks of stagflation. “A couple of Fed officials are floating ideas of maybe additional rate hikes — that’s not the consensus — but the fact that it’s being talked about now is kind of indicative of the situation that we’re in,” he said.

See Also: Fed’s Key Inflation Indicator Hits 2.8%, Dashes Rate Cut Hopes; Traders On Alert

Why It Matters: The latest GDP and inflation figures have sparked concerns among investors, hinting at a potential economic downturn worse than a recession. The U.S. economy’s first-quarter growth, at an annualized rate of 1.6%, fell significantly short of the anticipated 2.5%, according to the Bureau of Economic Analysis.

Despite the current economic stability, the Federal Reserve’s decision to maintain high-interest rates throughout 2024 has raised questions about its potential impact on the economy. Recent remarks from Fed Chair Jerome Powell and other policymakers have solidified the belief that rate cuts are unlikely in the coming months. In fact, there has been discussion about the possibility of one or two additional hikes if inflation fails to further ease.

Earlier in April, the U.S. economy was flagged for a possible recession by Lakshman Achuthan, co-founder of the Economic Cycle Research Institute (ECRI) and business-cycle expert. The ECRI's Leading Economic Index, known for its near-perfect track record, has been on a downward trend for the past year, despite a recent leveling off, past patterns suggest that a dip in this index often precedes a recession.

Read Next: Strong Quarterly Earnings Fuel Market Optimism Despite Inflation Concerns, Slowing Economic Growth

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