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27 Apr, 2024 10:01

US faces stagflation threat – Business Insider

The grim warning comes as growth falls short of estimates
US faces stagflation threat – Business Insider

The latest macroeconomic data released by the US Department of Commerce indicates that the country’s economy could be moving towards stagflation, Business Insider has reported. The gloomy signs hint at tough challenges ahead, the outlet added.   

Thursday’s report revealed that American GDP increased at an annualized rate of only 1.6% in the first quarter of the current year, well behind projections of 2.5%. The slower than expected growth followed a 3.4% gain recorded in October-December 2023 and 4.9% in the previous quarter. 

“This was a worst of both worlds report – slower than expected growth, higher than expected inflation,” David Donabedian, chief investment officer of CIBC Private Wealth US, told the media outlet. 

Weak growth and soaring consumer prices are distinct signs of stagflation, which is characterized by economic sluggishness and rising inflation over a prolonged period of time. The US was last hit with stagflation in the 1970s, when inflation surged into double digits as the economy tumbled. US policymakers responded by hiking the key interest rate to as much as 20%, cooling down prices but sending the economy into a deep recession. 

 In March, the US Federal Reserve skipped an interest rate hike, leaving it unchanged between the 5.25%–5.5% target range. The next meeting of the Fed’s Open Market Committee is scheduled on May 1. 

At the same time, the personal consumption expenditures price index, used as a key inflation measure by the Fed, increased at a 3.4% annualized pace, marking the biggest gain in a year. Consumer spending in the US saw a 2.5% increase in January through March, down from a 3.3% gain in the fourth quarter of 2023, and below the projected 3%, the Bureau of Economic Analysis reported. 

According to Business Insider, this puts serious limits on the Fed’s ability to take action, as the regulator has made clear it needs inflation to decline before any rate cuts can happen.