JPMorgan’s Jamie Dimon Warns of Stagflation Threat: The Dangerous Mix of High Inflation and Slowing Growth Could Hit Hard

Jamie Dimon, CEO of JPMorgan Chase, indicated on Tuesday that stagflation cannot be ruled out, even though recent trends suggest inflation is easing from its peaks. His caution comes as investors shift focus to emerging signs of slowing economic growth. While recent data show inflation moving closer to the Federal Reserve’s 2% target, reports on employment and manufacturing hint at potential economic softness.

Americans are worried of a potential return to a 1970s-style economic scenario, with stagflation looming due to high inflation and slow growth. They draw parallels between current geopolitical tensions and those from the 1970s, signaling potential inflationary pressures ahead.

JPMorgan Seeing Stagflation Risk

“I would say the worst outcome is stagflation — recession, higher inflation. And by the way, I wouldn’t take it off the table.” Dimon said this week at a fall conference from the Council of Institutional Investors in Brooklyn, New York.

Marko Kolanovic, the chief market strategist at JPMorgan, had expressed concerns in February about the impact of the recent rise in consumer and producer prices on the previously optimistic economic outlook that fueled growth in the stock markets.

According to him, the recent data is expected to erode investors’ confidence in a “Goldilocks” scenario, where the economy neither grows excessively nor contracts significantly. Instead, there are renewed worries about entering a phase reminiscent of the stagflation observed in the 1970s.

What is Stagflation

Stagflation is an economic condition characterized by a simultaneous occurrence of stagnant economic growth, high unemployment, and high inflation. This combination is considered unusual because inflation and unemployment typically have an inverse relationship, known as the Phillips curve. Stagflation poses challenges for policymakers as traditional tools used to combat inflation (such as raising interest rates) may exacerbate unemployment, and measures to stimulate economic growth (such as reducing interest rates) may worsen inflation. Tackling stagflation is challenging due to several reasons.

#1 Reduced Purchasing Power

High inflation erodes the purchasing power of money, diminishing the real value of wages and savings. This can lead to a decline in the standard of living for individuals and households.

Just over two years ago, in June 2022, the U.S. faced inflation nearing 9%. However, the latest Consumer Price Index (CPI) report for last month shows a much cooler inflation rate of 2.5% year over year.

The CPI report released on Wednesday reveals that while overall inflation has eased to 2.5%, core prices remain persistently high.

#2 Uncertainty for Businesses

Businesses may face challenges in planning and decision-making due to the uncertainty created by stagflation. The combination of slow economic growth and rising costs can be particularly challenging for companies.

#3 Increased Unemployment

Sluggish business growth will lead to increased unemployment. Americans will not only have to suffer high inflation but also many will loose their jobs.

In August, employers added 142,000 jobs on a seasonally adjusted basis, the Bureau of Labor Statistics reported on Friday. This marks a weaker-than-expected result for the second month in a row.

Additionally, job totals for June and July were revised downward by a combined 86,000 positions, dragging the three-month average to just 116,000 jobs—a significant signal that hiring is slowing. This downward revision comes on the heels of another massive revision a few weeks ago.

The U.S. economy created 818,000 fewer jobs than originally reported in the 12 months leading up to March 2024, the Labor Department revealed on August 21st.

In its preliminary annual benchmark revisions to the nonfarm payroll numbers, the Bureau of Labor Statistics indicated that actual job growth was nearly 30% lower than the initially reported 2.9 million jobs from April 2023 to March 2024.

#4 Interest Rate Pressures

Central banks may face difficulties in setting interest rates to address both inflation and unemployment. Higher interest rates to combat inflation could lead to increased borrowing costs for businesses and consumers, potentially exacerbating economic stagnation. Stagflation presents a policy dilemma for central banks and governments. Standard economic policy tools may be less effective, as actions that address inflation could worsen unemployment, and vice versa.

#5 Worsens Inequality

Stagflation can result in uneven effects on different segments of the population. While some may experience job losses and reduced incomes, others, particularly those holding assets like real estate or commodities, may see their wealth increase.

Related Article: 20 Ways To Invest In Real Estate With Little Or No Money

#6 Social and Political Consequences

Stagflation can contribute to social and political unrest. High unemployment rates and inflationary pressures can lead to dissatisfaction among the public, potentially influencing political dynamics.

Increased Consumer Price Index (CPI) and Producer Price Index (PPI) Raise Concerns

Stagflation is considered bad because it creates a challenging economic environment with conflicting issues that are difficult to address using traditional economic policy tools. It can result in reduced living standards, economic uncertainty, and social and political challenges.

Kolanovic said, “We already had one wave of inflation, and questions started to appear whether a second wave can be avoided if policies and geopolitical developments stay on this course.”

Expectations for a 50 bps Fed rate cuts next month have diminished in the markets due to sticky core inflation and resistance from policymakers.

Growing Concern on the Expanding Federal Deficit

Dimon expressed concern that various inflationary pressures, including rising deficits and increased infrastructure spending, could further strain an economy already struggling with the effects of higher interest rates.

According to the Congressional Budget Office (CBO), the deficit is expected to reach nearly $2 trillion this year.

This significant deficit is projected to push federal debt held by the public to 122% of GDP by 2034. Additionally, economic growth is anticipated to slow to 2.0% in 2024 and 1.8% in subsequent years.

 

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