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.
Stagflation offsets
“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.”
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended content
Editors’ Picks
EUR/USD edges lower toward 1.0700 post-US PCE
EUR/USD stays under modest bearish pressure but manages to hold above 1.0700 in the American session on Friday. The US Dollar (USD) gathers strength against its rivals after the stronger-than-forecast PCE inflation data, not allowing the pair to gain traction.
GBP/USD retreats to 1.2500 on renewed USD strength
GBP/USD lost its traction and turned negative on the day near 1.2500. Following the stronger-than-expected PCE inflation readings from the US, the USD stays resilient and makes it difficult for the pair to gather recovery momentum.
Gold struggles to hold above $2,350 following US inflation
Gold turned south and declined toward $2,340, erasing a large portion of its daily gains, as the USD benefited from PCE inflation data. The benchmark 10-year US yield, however, stays in negative territory and helps XAU/USD limit its losses.
Bitcoin Weekly Forecast: BTC’s next breakout could propel it to $80,000 Premium
Bitcoin’s recent price consolidation could be nearing its end as technical indicators and on-chain metrics suggest a potential upward breakout. However, this move would not be straightforward and could punish impatient investors.
Week ahead – Hawkish risk as Fed and NFP on tap, Eurozone data eyed too
Fed meets on Wednesday as US inflation stays elevated. Will Friday’s jobs report bring relief or more angst for the markets? Eurozone flash GDP and CPI numbers in focus for the Euro.