Stagflation threat is much smaller than feared

Trend watch

Weekly air passenger counts in the U.S. jumped 6.0% in the past seven days, up nearly one million from the prior week, and eclipsing to 17.6 million. That’s a strong start to the spring break season.

If it follows the usual seasonal pattern, passenger counts should continue to climb for the remainder of March and early April, plateau in mid-April until the first full week of May. Thereafter, summer traffic starts.

Additionally, we’ll continue to include the personal tax refunds chart, which we show on slide 7 (available to clients in the full report), through the end of tax filing season.

Our take

The onset of the Iran conflict has stoked fears of stagflation, which is the mashup of a stagnant economy and high inflation. Indeed, the pain at the pump that we outlined here last week is very real, particularly given the 50% spike in crude oil prices, or more than a $30 per barrel increase in the past two weeks.

Inflation and interest rates are ramping up globally, while simultaneously diverting spending to energy from other spending, and uncertainty is mounting. While the U.S. is largely insulated from an energy supply shock since more than 90% of our supply is sourced within North America, prices are set globally, which is being impacted by the effective shutdown of the Strait of Hormuz. Still, the determining factor for the U.S. economic drag will be the duration of the conflict and level of crude oil prices.

Americans are rightly leery of inflation, which erodes purchasing power for consumers, especially after having gone through the painful post-COVID inflation spike during 2021 and 2022.

Nonetheless, stagflation is quite rare. The most notable instance was in the U.S. during the 1970s. It was caused by a series of events and multiple policy mistakes. Some historians conveniently blame the 1973 oil embargo as the cause of the 1970s stagflation period, but the root causes began more than a decade before. Stagflation also requires a spike in the unemployment rate.

Flashing forward to today, the stagflation comparisons are unfounded for three key reasons. First, the aforementioned decreased dependence on imported crude oil by the U.S. While the U.S. won’t be entirely immune, the closure of the Strait of Hormuz will not materially impact domestic crude oil supply.

Second, U.S. growth is running near pre-pandemic levels and is driven by several catalysts, including the massive AI buildout, which should continue for several years.

Third, while job growth has been weak, the unemployment rate is hovering around 4.5%. That’s well below the historical average of 5.7% since 1948. Moreover, wage gains have outpaced inflation for three years and should continue.

Bottom line

We’ve described the U.S. economy as feeling like it has one foot on the gas (fiscal and monetary stimulus) and one foot on the brake (trade and tariff uncertainty, underwhelming job growth, and now the Iran situation). Included in the persistent “low hire/low fire” environment. This muddled backdrop likely keeps the Federal Reserve in a holding pattern in the near term after last year’s pre-emptive rate cuts.