Stagflation Risks Rising

Last week we received retail sales data from which we learned that the consumer continues to do relatively well on the back of strong job and wage growth. A number of retailers reported last week as well, which generated talk in the markets about whether a slowdown was coming. But they too reported strong consumer demand. Their challenges mainly came from the cost side—on supply chain, on labor and wages, and on energy and other input costs. In the week ahead we will receive the FOMC minutes, which will shed more light on how the Fed is thinking about inflation and growth. The minutes are likely to reinforce the same messages we’ve been hearing: that the economy remains strong, that inflation remains a problem, and that interest rates will therefore need to go higher. Meanwhile, we’re beginning to see increased risks of stagflation as the consensus expects inflation to rise and growth to fall. Against this backdrop, we anticipate continued market volatility fueled by ongoing uncertainty about rates and inflation, as well as downward pressure on equities.


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