Stagflation, USA

In a previous post I wrote about the likelihood that the US economy would experience Inflation (including the hyper-inflation variety), deflation and stagflation.

You can read the full reasoning in that post, but the short answer was that I saw the most likely outcome to be surging inflation followed by deflation. I didn’t make much of stagflation at that time, but it may be time to reassess…

The reason is a best highlighted by a respondent to the Kansas City Fed’s recent Manufacturing Survey said:

“Stimulus and increased unemployment money are wrecking the labor pool. Lower level employees are quitting to make just as much not working.”

Job openings and postings are up, but the labor participation rate (number of working age adults) is still at a rather high 61.4% and unemployment is still 6.2%. This shows that people are not looking for work.


Many of those not in the labor force (and not looking to be) are in lower paying, menial jobs and they’ve discovered that it’s easier to sit at home and collect stimulus checks and COVID bonus payments than to work a low wage job.

In short: The Biden Administration’s stimulus package has distorted the labor market.

This not only raises the cost of employment (and hence the cost of goods and services, as employment costs are passed on to consumers), it also means more supply chain disruptions and scarcity:

“It is very difficult to handle the increased business with supply chain issues across all materials and finding anyone who wants to work. The federal government has incentivized people to stay home and not be productive.”
Selected Manufacturing Comments

Other employers report: 

“Unemployed workers have no incentive to return to work given the COVID bonus payments.”
Selected Manufacturing Comments

This also has other repercussions for the real economy, such as a labor shortage that could stall the recovery

A stalled economy means “Stagflation”, and higher prices mean “Inflation”, so the system now looks primed for a stag-flationary outcome.

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