The forces of stagflation may be offset by prompting central banks to continue stimulus, lawmakers to roll out additional fiscal stimulus in the US and Europe, business leaders to invest in a wave of capital spending, accompanied by a sharp rebound in output by the service sector, Jeffrey Kleintop, Senior Vice President and Chief Global Investment Strategist at Charles Schwab, briefs.
“Central bank stimulus. In the 1970s, central banks reacted to slowing output and rising prices with tighter monetary policy. Today’s response sharply contrasts this historical approach. The Fed and European Central Bank (ECB) continue to insist that the ongoing rise in inflation will be ‘largely transient’ and intend to be very slow to tighten policy.”
“Fiscal stimulus. President Biden’s plans for yet another huge US stimulus program and Europe’s massive rescue spending rolling out this summer may further feed demand, rather than lift supply. Besides being inflationary, these programs may also support business, consumer, and investor confidence through any soft patch in output or jobs.”
“Capital spending. Supply constraints may compel more capital investment by businesses.”
“Services rebound. The EU’s services sector may snap back on re-openings in the coming months. Because this year’s virus restrictions in Europe focused on services rather than the manufacturing sector, the economic re-opening should help the larger service portion of the European economy offset any weakness in manufacturing.”
“While the current environment does have some resemblance to the 1970s, the differences are likely powerful enough to keep investors focused on the positives of reflation, defined by solid growth accompanying inflation, rather than the negatives of stagflation.”