The last time stagflation plagued the global economy was during the 1970s. In that instance, stagflation was ultimately tamed by a combination of tight monetary controls – meaning higher interest rates – and economic stimulus via reductions in personal income taxes. But it took nearly a decade to reign in the effects of stagflation in what proved to be a slow, painful process.

Today, stagflation remains a possible economic outcome of the global pandemic. Still, at the moment, global growth remains strong as economies reopen from the doldrums of 2020. Unfortunately, however, that growth has come with a jolt of higher inflation. In turn, for central banks around the world, inflation raises a red flag of caution for economies struggling to recover from the ill effects of the pandemic. And there’s always the potential for governments to ease back on their public spending.

A balancing act

 It becomes a bit of a balancing act for central banks. Inflation could be tamed with higher interest rates (in effect, the cost of borrowing money goes up). But this comes with the risk of squashing economic recovery as companies put off expansion plans due to the higher interest rates to borrow money. Hence, there’s a reluctance on the central banks to put on the breaks just yet. Moreover, despite rising global inflation, the problem is heavily tilted towards the US economy.

In a recent article published by Erik Norland, executive director and senior economist of derivates exchange CME Group, entitled, “Surging Inflation is a U.S. Phenomenon, Not a Global One,” he says that “surging US inflation has outpaced inflation in Europe, China and elsewhere, as the rate hit a 13-year high of 5.4% in June and July.” And Norland goes on to explain that “rising US inflation may be the result of divergent employment benefits or a consumer spending boom fuelled by the government’s fiscal response to the pandemic.”

The following table illustrates his points. Even if we exclude volatile food and energy costs, US inflation continues to run higher than much of the rest of the world. 

Note: Data are annualized inflation rates based on July 2021 monthly results for country-specific consumer price index (CPI).

The US government's aggressive approach to unemployment may explain why US inflation remains high compared to other countries and regions such as Europe. When the US economy tanked in 2020, the Biden administration pumped literally trillions of dollars into the economy. Which, in turn, followed broadly expansionary policies of the Trump Administration that included tax cuts and direct government stimulus. In short: many American citizens received direct government subsidies.

Indeed, when unemployment spiked in 2020, there was a lot of money put directly into the pockets of average Americans. Not surprisingly, consumer spending soared on a wide range of consumer goods. With extra money in their pockets, Americans went spending. And to the extent that global supply chains have been playing catch up ever since.

See what I mean? US GDP has soared since the depths of the pandemic-induced economy of 2020. But soaring demand comes with added costs, namely price inflation. Inflation is insidious in many ways. Often, it originates with tight labour markets. However, high raw material prices can also contribute to more significant overall inflation. For example, look at cotton prices:

Higher consumer demand can also affect inflation. Government stimulus plays a role here, along with pent-up consumer demand for stuff. Never underestimate consumer psychology. Hence, supply and demand are imbalanced. 

Additionally, there's also the psychology of our industry. US apparel imports are up sharply from pandemic lows. Still, imports have really taken off over the past few months as brands and retailers accelerated purchases. They did so to avoid a repeat of 2020 when shelves stood bare or were stock with out-of-season merchandise. What's added to the urgency is the spreading Delta variant of the Covid virus. It's a wild card in many ways.