With a series of recent economic data showing that the rate of inflation cooling in the United States is slower than expected, JPMorgan Chase released a report on Wednesday Eastern Time stating that the US economy is at risk of sliding into a stagflation dilemma (i.e. a period of low growth and sustained high inflation).
This view is in stark contrast to the previous predictions of many "blonde girls" in the market - previously, many market analysts were optimistic that US inflation would gradually cool down and the economy would grow strongly.
Stagflation dilemma or resurgence?
During the period from 1965 to 1982, the United States was once mired in the quagmire of "great stagflation": the average annual price level in the United States rose by nearly 8%, accompanied by high unemployment rates and weak economic growth.
JPMorgan Chase points out that the stagflation like environment of the 1970s may be repeated today, which will prompt investors to shift from stocks to fixed income assets that can provide higher returns.
The company wrote in its report, "From 1967 to 1980, the performance of the US stock market remained stable, while bonds performed significantly better than stocks."
In fact, Jamie Dimon, CEO of JPMorgan Chase, had previously suggested that the situation facing the United States in 2024 is likely to be similar to that of the 1970s. He pointed out that factors such as huge fiscal deficits, changes in trade patterns, and massive government spending can all trigger inflation.
Morgan Stanley's strategist Marko Kolanovic once again stated in a report on Wednesday that the recent rebound in US consumer prices (CPI) and producer prices (PPI) has cast a shadow over the optimism of the US economy, and investors may shift their focus from the expected "blonde girl" scenario to a return to stagflation in the 1970s.
The latest data released by the US government shows that the year-on-year growth rate of the US non quarter adjusted CPI in January was 3.1%, although it is the lowest level since June 2023, it is still higher than the market expectation of 2.9%. After excluding volatile food and energy prices, the year-on-year increase in core CPI recorded 3.9%, which is also higher than the market expectation of 3.7%. In addition, the PPI released later that week was also stronger than expected.
Kolanovich stated in his report that given the rise in the stock market, tight labor market, and high government fiscal spending, the rise in inflation is not surprising.
The tense geopolitical situation will exacerbate the risk of stagflation
JPMorgan also cited geopolitical tensions as a potential reason for stagflation.
In the 1970s, the conflict between Vietnam and the Middle East led to the United States facing energy crises, shipping disruptions, and a surge in deficit spending. Now, the Red Sea chaos caused by the Palestine Israel conflict and the supply chain disruption caused by the Russia-Ukraine conflict are similar.
JPMorgan Chase stated that the uncertain geopolitical situation, combined with a high interest rate environment, may reduce liquidity:
"If fluctuations caused by political, geopolitical, and regulatory uncertainties are added, the public market will be further disadvantaged compared to the private market, which can avoid daily fluctuations," the report added.