Opinion

The Stagflation Threat Is Real

Nouriel Roubini

By Nouriel Roubini

By Nouriel Roubini

I have been warning for several months that the current mix of persistently loose monetary, credit, and fiscal policies will excessively stimulate aggregate demand and lead to inflationary overheating. Compounding the problem, medium-term negative supply shocks will reduce potential growth and increase production costs. Combined, these demand and supply dynamics could lead to 1970s-style stagflation (rising inflation amid a recession) and eventually even to a severe debt crisis.

Until recently, I focused more on medium-term risks. But now one can make a case that “mild” stagflation is already underway. Inflation is rising in the United States and many advanced economies, and growth is slowing sharply, despite massive monetary, credit, and fiscal stimulus.

There is now a consensus that the growth slowdown in the US, China, Europe, and other major economies is the result of supply bottlenecks in labor and goods markets. The optimistic spin from Wall Street analysts and policymakers is that this mild stagflation will be temporary, lasting only as long as the supply bottlenecks do.

Read the full Project Syndicate article.

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Nouriel Roubini is a Professor of Economics and International Business and the Robert Stansky Research Faculty Fellow.