‘This is not 1973’: Economist rules out ‘stagflation’ and persistent price pressures

Gas prices are seen after U.S. consumer prices surged in April, with a measure of underlying inflation blowing past the Federal Reserve’s 2% target, in Beverly Hills, California, June 2, 2021.

Lucy Nicholson | Reuters

Inflation expectations are still being driven by a “temporary spate of supply issues” and there is no sign of continued upward pressure on prices, according to veteran economist Carl Weinberg.

Global stock markets were roiled on Tuesday by a spike in bond yields which saw the benchmark 10-year Treasury yield touch a high of 1.567%.

Along with concern over the U.S. debt ceiling debate in Washington, investors are also concerned about rising consumer prices. Federal Reserve Chair Jerome Powell told the Senate Banking Committee on Tuesday that inflation could persist for longer than expected as reopening pressures and supply chain problems converge.

Speaking to CNBC’s “Squawk Box Europe” on Wednesday, Weinberg, chief economist at High Frequency Economics, said the global semiconductor shortage, bottlenecks at ports and Covid-19 impediments were a “temporary spate of supply issues” rather than systemic inflationary pressures.

“Inflation is a process and not a one-time change in the level of prices, which I think is what we’re seeing right now,” Weinberg said.

“We’re seeing an adjustment to new temporary realities on the supply side but we’re not seeing the stagflation process that we saw in the 1970s recurring again.”

Stagflation refers to a situation first identified in the 1970s in which inflation is high, economic growth slows and unemployment remains consistently high. The problem for economic policymakers in such an instance is that measures to curb inflation, such as wage and price controls or contractionary monetary policy, may further increase unemployment.

Weinberg said he did not yet see a basis for such a scenario, adding: “This is not 1973.”

While acknowledging that a “large segment” of the market believes that inflation will be persistently higher, which in turn is driving up bond yields, Weinberg argued that there are many other factors keeping the U.S. economy imbalanced, “not least of which is Covid.”

“With so many Americans resisting vaccination, that will continue to be a problem, and a brake on the economy, for a very, very long time. The chip problem has no short-term solution to it, the supply bottlenecks at the port don’t have a short-term solution,” he said.

He argued that this was not the Fed’s fault and that “supply and demand will rebalance,” meaning prices will stop rising “after a certain point.”

“We’re just going through a really rough patch right now as we reopen the economy at a pace never before seen, after a closure that we’ve never seen before, and we’re getting some unexpected bumps along the way,” Weinberg said.

“I’m not sure though that you can add that up into a story that says that beyond the immediate reopening, that we’re going to see continued upward pressure on prices.”

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