This is not stagflation

The current environment of rising commodity prices, high inflation and strong geopolitical uncertainty is quite logically reminiscent of the 1970s, and therein raises the threat of “stagflation”. However, this environment does not exactly present the characteristics of stagflation, which is defined simultaneously by high inflation, low growth and above all a high unemployment rate. The tensions on labor markets in developed countries do not validate the stagflation scenario. On the contrary, the current “reconstruction” environment is even closer to “reflation”!


The recent crises (trade tensions between the United States and China, Covid, war in Ukraine) have all led to a double consciousness in Europe: the need to invest to accelerate the environmental transition and the need to accelerate strategic independence ( in the defense). , digital, health, energy and food sectors). For Europe, we have estimated all these additional investment needs at around 3% of GDP per year for 10 years: 2% for environmental transition, 0.5% for digital, 0.4% for defense and 0 .3% for energy security. Knowing that employment is “complementary” to investment, this means that to succeed in economic transitions, companies need to develop human capital. This period of push for public and private investment also allows us to consider full employment as a prospect that is now possible. This would therefore invalidate the stagflationary threat.

A double scarcity of work

Beyond the support of growth and employment, this period of change in the economic model is, it is true, inflationary. In fact, the investment drive in the developed economy is so important that it is quite normal to be confronted with a scarcity of resources, be it physical capital, human capital or financial capital: economic models of adjustment require material resources before they do not exist in sufficient quantity. Businesses are faced with a double labor shortage. On the one hand, the demographic limitation reduces the availability of human capital in “quantity”. On the other hand, the need for transition requires new skills that do not exist. Economic policy responses involve training and labor immigration.

If the investment rate increases without adjusting consumption and thus saving, there will be a tension on the market of financial resources that will result in an additional increase in real interest rates. A 3% increase in the investment rate without adjusting savings would ultimately cause an additional increase in “equilibrium” interest rates of about 250 basis points, on a Bund benchmark.

Paradigm shift in monetary policies

Finally, inflation is durable and will persist beyond the drop that occurs at some point in oil and gas prices. This new fundamental situation leads to a paradigm shift in the behavior of central banks. If central banks cannot fight against inflation linked to the increase in the price of raw materials, they have on the other hand the task of intervening if there is a risk on the cycle” price-wage”. For this, they obviously have their eyes riveted on inflation expectations. But beyond expectations, there is an inflation threshold beyond which economic behavior changes: families and companies become more attentive to price changes and adjust more systematically, especially with wage demands. We have assessed this limit at 8%, which means, in the light of the latest inflation publications (+8.5% over a year in the United States and +8.9% in the euro area), that behavior changes.

This paradigm shift in the conduct of monetary policy is reflected in three ways. First, central banks can no longer maintain “forward guidance”, i.e. give an outlook on monetary policy with high visibility. They are again “data dependent”, which feeds uncertainty and therefore volatility on yield curves. Second, capitalizing on the monetary experience of the 1980s, central banks do not lower their key interest rate in the event of a recession in order not to push back inflationary expectations, even if it is costly in the short term for growth. Finally, the “Put” from the central banks in case of a correction in the financial markets is no longer automatic. Recent statements from central bankers show that the improvement in financial conditions this summer was not seen positively. In other words, central banks may also want the price of risky assets to adjust.

Thus, the central banks have intensified their monetary tightening, either to raise the key rates that are still underestimated by the markets, or to accelerate the deflation of the budgets.

Recession in sight

This new deal profoundly changes the methodology used to draw up an economic scenario. Until now, it has been customary to start with the economic outlook, then move on to inflation and conclude from this what this implies for monetary policy. From now on, we need to rethink this order: first, we need to extend the horizon, presenting the long-term growth prospects to deduce what this means on the inflation regime and on the reaction of the power plants of the banks. From this, we can deduce the economic outlook. From this perspective, the developed economy faces two adversities. First, the past increase in commodity prices will cause a global industrial recession at the turn of the year. So, developed economies should digest the increase in rates and the withdrawal of liquidity that necessarily constitute a “test” for the real economy. The economy of the United States, which has the most advanced monetary normalization, will be the first to be affected.

Finally, for the next 18 months, the developed economy will face recession, which will give the impression of stagflation. In any case, investment programs and recruitment needs make it possible to foresee an “exit top”, with a desired and desirable normalization of interest rates!

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