Will inflation return to the 1970s? Deutsche Bank explained in 4 articles…

Investors have good reason to worry that inflation will return and follow a path similar to that of the 1970s, according to Deutsche Bank. This means that the US Federal Reserve (Fed) cannot afford to claim victory yet.

Strategists have flagged the possibility that the United States and other economies could once again enter a period of stagflation as consumer expectations about future inflation spiral out of control. It was claimed that this situation could result in a period of high inflation and slow economic growth that shook the economy in the 1970s and early 1980s.

“But now is not the time for complacency and there are reasons to be cautious,” banking strategists warned in a note published Monday. Here are four reasons why markets should worry about a resurgence in inflation:

1- Inflation remains above the target in all G7 countries

In most developed economies, price increases are well above central banks’ targets. According to the latest data, US inflation rose to 3.7 percent annually in August, a faster rise after the 3.2 percent recorded in July.

2- A new price shock could easily alter inflation expectations

Inflation has been above central banks’ targets for nearly two years and remains higher than pre-pandemic levels in the United States and much of Europe.

“If another shock occurs and inflation remains above target in the third or even fourth year, we should expect long-term expectations to remain consistently below actual inflation,” the strategists said.

3- Economic growth is stagnant

Tightening financial conditions are starting to hurt the economy and there is little reason for this to change.

The US debt-to-GDP ratio has also risen well above its level in the 1970s, limiting the amount of fiscal stimulus that can be used to spur economic growth.

Given how sticky inflation is, easing monetary policy to help growth may also be out of the question.

4- The last period of the Federal Reserve’s war on inflation is often the most difficult.

It is difficult to say when the Fed should start easing monetary policy. As inflation moves closer to its target, markets are putting more pressure on the Federal Reserve to lower rates as higher borrowing costs weigh heavily on asset prices.

This situation is further aggravated by the fact that monetary tightening has a delayed effect on the economy. In other words, the consequences of the interest rate increases made 18 months ago may not yet have been felt. All of this increases the risk that the Federal Reserve will overshoot and push the economy into recession, which was one of the markets’ biggest concerns last year.

“Over the past 18 months, there have been many hopeful signs that a return to the 1970s can be avoided… But it is too early to say everything clearly, at least for now,” the strategists warned.