Inflation, stagflation, or recession – or all 3?

Financial news has been unavoidably bleak over the past few months. Specifically, inflation woes, as well as the prospects of a recession or stagnating economy, are topics concerning investors and consumers alike.

Here are our insights and views on inflation, stagflation and a recession.


Inflation, as measured by the Labor Department’s Consumer Price Index, or CPI, hit a 41-year high of +8.6% in May. The report eliminated hopes that March’s year-over-year CPI increase of +8.5% represented a ‘peak’ in the current inflation surge.

Higher gasoline prices were a material contributor to the overall price gains seen in May, with  automobile fuel costs up 4% month-over-month and a dramatic 49% higher than year-ago levels. Gasoline will likely offer an even larger boost to inflation in June, in our view. However, we believe prices outside of energy are in a process of peaking.  

Our view

We believe the combination of higher interest rates from the Federal Reserve and slowly improving supply-chains should result in an easing of inflation pressures in the second half of 2022. We do not expect most prices to decline in absolute terms, but rather we anticipate the broader pace of price appreciation to slow.


In economic terms, a period of high inflation and stagnant economic growth is referred to as “stagflation.”

Here’s how this phenomenon could play out:

Higher prices and rising interest rates are each a drag on the pace of economic activity. Higher prices reduce consumer purchasing power and reduced their overall spending while higher interest rates negatively affect borrowing and spending. This combination could cause the economy to stall or stagnate over the near-term. We’re likely to hear the term “stagflation” much more frequently in the months ahead.

What history tells us

Stagflation is most associated with the challenging economic environment of the 1970’s. Though there are similarities, we do not see the current environment as fully comparable with that prior period.

There are two key differences, in our opinion:

  1. The stagflation of the 1970’s lasted years. Real economic growth was slightly negative in 1974 and 1975, while inflation was allowed to linger and become entrenched, ultimately lasting nearly a decade, according to the Consumer Price Index. Today, the Federal Reserve is acting aggressively to slow the economy and reduce price pressures.
  2. Unemployment was relatively high in the 1970’s, averaging 6.9% from 1974 through 1980. Today, the unemployment rate is 3.6% and the job market is tight. Although labor market conditions may slow in the months ahead, we expect the job market to remain relatively healthy, overall.

Our view

We believe a sustained period (several quarters) of stagflation is unlikely – but not out of the question given energy markets.  


Real (i.e., inflation adjusted) consumer spending declined by a weaker-than-expected 0.4% in May, according to a recent Commerce Department report. With those new numbers in mind, we revised our real U.S. GDP growth estimates for Q2 to just +0.3%. This leaves little room for error in keeping growth for the period in positive territory and also begs the question: “Are we already in a recession?”

Our view

It’s important to note that recessions are no longer measured as two consecutive quarters of negative real GDP growth. They are now determined by a committee of economists that consider a number of economic measures, including changes in employment, personal income, business investment, industrial production and other factors. We do not believe economic conditions of the last several months would qualify under the enhanced qualifications.

However, depending on the intermediate-term path of inflation and resulting Federal Reserve policy response, the U.S. economy could slip into a recession over coming quarters. In our view, however, any such downturn in activity would likely be relatively short and shallow, and distinctly less painful than the Great Recession of 2008-09.

In summary

We believe the economy’s underlying fundamentals, as represented by healthy consumer and business balance sheets, offer a solid base of support to economic activity, overall.

If you have questions about how the current economic environment may affect your financial goals, please contact your Ameriprise financial advisor who can help tailor your portfolio to match your needs and objectives.