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June 13, 2022, 12:46 p.m. EDT

Stocks sink as inflation fears trigger shock waves: What investors need to know about stagflation

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By Joseph Adinolfi

From Wall Street to Main Street, fears that the U.S. economy could be sliding into 1970s-style “stagflation” have been percolating.

References to the sticky situation appeared in news headlines all last week. The Associated Press called it “the dreaded ‘S’ word.” The Wall Street Journal reminded readers of the neologism’s origins as a catchy way to describe an environment of slowing or stagnant economic growth, jobs losses, plus inflation.

The World Bank also evoked it when warning about a “protracted period of feeble growth and elevated inflation,” while announcing that it had just cut its outlook for global economic growth by nearly a full percentage point.

Then things really came to a head on Friday. The May reading of the U.S. consumer-price index — a closely followed gauge of price pressures in the economy — deflated hopes on Wall Street, and in Washington, D.C., that inflation had already reached a “peak.” Instead, the headline inflation number for May came in at 8.6% annualized, a new cycle high.

Read : Rising rents, gas and food prices push U.S. inflation to 40-year high of 8.6%, CPI shows

Many economists were quick to note the U.S. hasn’t quite yet slipped into stagflation. Not with the labor market still extremely robust. The U.S. economy also contracted in the first quarte r, but few expect that to be repeated during the second quarter.

Given the warning signs, it’s important to know how stagflation might impact portfolios and savings.

The bottom line is this: from stocks /zigman2/quotes/210599714/realtime SPX -1.44% to gold /zigman2/quotes/210034565/delayed GC00 -0.70% , if stagflation becomes a reality, investors have depressingly few options available to protect against the backlash, according to a handful of economists, portfolio managers and market experts.

Why should stagflation be a worry?

Stagflation worries often focus on the inflation side of the equation. As Friday’s CPI number confirmed, the pace of the inflation quickened in May to a new cycle high.

The data prompted a flurry of reactions from economists, including teams at Capitol Economics, Barclays and Jeffries, who suggested that the Federal Reserve might opt to raise the fed-funds rate by 75 basis points when its policy-setting board meets next week, or perhaps at the following meeting in July.

Others ridiculed the notion of “peak inflation,” the idea that price pressures had peaked in March, and then started to slacken in response to the Fed’s measures. The Feds first hike to its policy rate since 2018 came in March, but has been followed with plans for much higher interest rates this year.

The CPI data wasn’t alone in terms of alarming data points released on Friday. The University of Michigan’s consumer survey , also showed consumers are even more pessimistic now than they were during the depths of the financial crisis.

As for the pace of economic growth, there are signs that the U.S. economy may be headed for negative growth for the first half of the year. The Atlanta Fed’s GDPNow forecast sees economic growth in the second quarter coming in at 0.9%, following the 1.5% contraction during the first quarter.

Most economists define a recession as two consecutive quarters of economic contraction, so even if the Atlanta Fed’s forecast comes to pass, the U.S. wouldn’t technically be in recession, even if the economy ends up contracting in the first part of the year.

What the labor market is saying

Employment remains the lone bright spot of the economy right now: the unemployment rate remained at 3.6% in May as the U.S. economy added 390,000 jobs.

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Oct. 5, 2022 11:22a
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