Slow growth, sticky prices: a whiff of stagflation

The first-quarter economic accounts delivered an uncomfortable combination of figures that evoked unpleasant memories of 1970s stagflation. US GDP expanded at a sluggish annualized rate of 1.6 per cent—well below consensus forecasts—while the core PCE price index accelerated to an annualized 3.7 per cent. Slower growth alongside firmer price momentum is a central banker's worst nightmare.

The Stagflationary Squeeze

This toxic cocktail leaves the Federal Reserve in an acute institutional bind. If policymakers ease to support decelerating economic output, they risk entrenching runaway core inflation. If they raise rates further to crush sticky prices, they risk tipping a decelerating economy into a full-blown contraction. Slower growth with accelerating inflation eliminates the central bank’s room for maneuver.

First-quarter data delivered a faint whiff of stagflation, confronting monetary policymakers with the dreaded dilemma of slowing economic growth accompanied by stubborn price acceleration.