Top Economist Sees Potential 1970s Style Inflation Looming

Washington DC, USA, 1977.
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Some economists are saying that the U.S. might be soon approaching a 1970s-style inflation situation. Stephen Roach, former Morgan Stanley Asia chairman, tells CNBC he is worried that the impact of energy price spikes on China’s struggling supply chain will be the tipping point and warns of stagflation, a situation where economic growth falls but inflation stays high.

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“We’ve had supply chain issues really now for the past year and a half. They’ve afflicted many commodities, inputs like semiconductors and now there’s energy and power-related shortages in China,” Roach told CNBC yesterday.

Last year, Roach warned about China’s supply chain problems as the country was trying to cope with COVID-19 shutdowns, saying now that “we were sort of one supply chain glitch away from stagflation” and “that seems to be playing out, unfortunately,” according to CNBC.

“It’s worrisome for the overall economic outlook and raises serious questions about the wisdom of central bank policies — especially that of the Federal Reserve,” he told CNBC.

Roach added that the likelihood of continued supply chain bottlenecks moving from one area to another is strikingly reminiscent of what we saw in the early 1970s, and suggests that inflation will stay at these elevated levels for longer than we thought.

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“The Federal Reserve is already beginning to backpedal on its recent view that these pressures will fade quickly.”

He added that if stagflation materializes it could coincide with the holiday spending season and “the impact will primarily be through the price level,” said Roach. “We need to look much more carefully about the potential risks.”

The worries echo those expressed by Fed Chair Jerome Powell. Speaking at the European Central Bank Forum on banking policy, he said that while he expects inflation to ease eventually, he sees the current pressures running into 2022, GOBankingRates reported.

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“It’s also frustrating to see the bottlenecks and supply chain problems not getting better — in fact at the margins apparently getting a little bit worse,” he added. “We see that continuing into next year probably, and holding up inflation longer than we had thought.”

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