Some economists are worried about “stagflation” — and it’s bringing on ’70s-era déjà vu to the market

When you blink and gas is $5... Your move, J-Pow. Two months ago, the Fed thought conditions were ripe for hiking interest rates to fight inflation: Covid in retreat, a strong labor market, and a rebounding economy. Then Russia invaded Ukraine.

• Surge: Sanctions against Russia have sent the prices of commodities like oil and wheat soaring.
• Change of plans: Last week, the Fed hiked rates by a quarter point, half of what some expected pre-war.
• Soft landing: The Fed’s still worried about inflation and signaled six more hikes this year. But it’s also worried rapid hikes could slow growth.

A ’70s economic monster could return… its name: stagflation (aka inflation + stagnant growth). Typically, inflation and recessions don’t happen simultaneously. But when they do, profits can shrink, assets like stocks can tumble, and workers can lose jobs. When stagflation last reared its head in the 1970s after an oil shock, economists weren’t sure what to do and markets slumped for a decade. Former Fed Chair Paul Volcker intervened by raising rates to historic levels, which led to a painful recession.

• Echoes: The war keeps pushing oil higher, and since it still fuels the world, that could contribute to a recession.
• Outlook: Goldman Sachs estimates that the odds of a US recession are as high as 35%, and it’s already cut its growth forecast for this year.
• Pocketbooks: Higher rates = higher borrowing costs for consumers. E.g.: the rate on a 30-year mortgage just ticked above 4% for the first time since 2019.
• Limits: While rate hikes can curb inflation, they can’t fix geopolitical jolts.