The War between Russia and Ukraine will likely intensify Stagflation, a combination of stagnant economic growth and inflation. It will develop a 1970 type scenario of Stagflation. In 1971 due to Stagflation, there was a plunge in the dollar’s value compared to other currencies. Although this time it won’t be much higher. It will describe the economy with little to no growth since its level of demand drives price levels.
What Summers has to say on Stagflation
The said information was shared by the former Treasury Secretary Larry Summers. He added that we are now confronting the real trouble of a 1970-type scenario. Not relatively as high levels of inflation as we saw in the 1970s, but the kind of broad phenomena of Stagflation.
It all started in the year 2020-2021. After that, inflation became an emphasis of distress that will collapse the economy. It is an outcome of the high rise in consumer prices that jumped to 7.5% in 12 months. Therefore, due to the increasing interest rates, Stagflation became an extreme danger for the economy.
Major predictions of economists about Stagflation
According to a Harvard professor, War and stimulus given by the government provoked Stagflation. In addition to this, plenty of economists doubted that there would be skyrocketing oil and other commodities prices. As a result, consumers will face scarcity of other goods. It can also lead to increasing unemployment.
Nonetheless, Summers has cited the passed $1.9 trillion Covid-19 relief bill as a massive stimulus. He blames the stimulus as a major cause of Stagflation. He said, “Monetary policy is an effective tool, but it may not be an effective tool without engineering a slowdown.” Summers’s views on Stagflation are that inflation would be unanchored for two years without a slowdown in the economy.
According to the news reports shared by Bloomberg Quint, the Fed needs to boost rates to quell inflation.
