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Stagflation: Looming Threat Could Intensify Inflation Worries

Isaac Nuriani    |
Jul 23, 2021

Any doubts that America is on the verge of full-blown inflation are evaporating with each passing month. The latest: On the heels of surprising year-over-year Consumer Price Index (CPI) leaps in April (4.2%) and May (5%), the CPI again left mouths agape with a 5.4% increase for the month of June.

Despite a big jump in CPI for a third straight month, Federal Reserve Chairman Jerome Powell has not budged from his no-rate-increase stance. In testimony before the U.S. House of Representatives Financial Services Committee on July 14, Powell made it clear that the Fed’s biggest concern is still support for the overall economy as it claws its way back from the effects of the pandemic.1

More specifically, Powell said the Fed would have to see “substantial further progress” on a reduction in the unemployment rate before reducing its program of monthly bond purchases. Unemployment remains around the 6% level, and there still are 7.5 million fewer jobs now than there were before the pandemic.

The stubbornness of the unemployment figure is causing even greater worry about inflation in some corners, especially after all the easy-money help thrown at the economy by the Fed. We now are beginning to hear talk that the economy could be looking down the barrel of one of inflation’s most insidious manifestations: stagflation. This is a condition characterized by inflation without economic growth (the word is a combination of “stagnation” and “inflation’).

Some of you might recall the economically tumultuous 1970s were characterized by stagflation. For the decade (1970-1980), annual inflation averaged nearly 8%, with monthly figures frequently reaching double digits.2 During the same period, annual unemployment averaged 6.5%.3 However, for savers savvy enough to look outside of mainstream assets for relief, there was some good news. While so many other assets struggled during the 1970s, gold and silver thrived.

The possibility of any level of stagflation is a worry and underscores the importance to retirement savers of including an inflation-defense strategy as a part of their savings regime. A part of that strategy could be including physical precious metals in their base of assets.

Economist: Delta Variant Could Trigger Stagflation in U.S.     

The talk that stagflation could be knocking on America’s front door shortly is not merely idle chatter from alt-financial observers. Economist Desmond Lachman, former deputy director at the International Monetary Fund, talked about this in a recent piece for The Hill. He suggests there’s a “real risk” America could revisit stagflationary conditions that characterized part of the 1970s.4

According to Lachman, the culprit this time around could be effects of wildly expansionary fiscal and monetary policy combined with persistently high unemployment that might worsen due to the COVID-19 Delta variant.

Lachman notes the December 2020 COVID stimulus package and the American Rescue Plan together will infuse the economy this year with what amounts to a record peacetime budget stimulus equal to 13% of gross domestic product (GDP).

Then there’s the Federal Reserve’s relentless devotion to its 120-billion-dollar-per-month asset-purchase program. Lachman says this is keeping interest rates at record lows and fueling money supply growth at the fastest rate in four decades. Against that backdrop, Lachman notes, is unemployment, which is stuck at or around 6%, well above the full employment level Fed chairman Powell says is a condition that must be met before rates can go higher.

Lachman sees a possibility that the highly infectious Delta variant ultimately could wreak havoc on global supply chains and already-struggling employment. Worries about the potential return of widespread lockdowns already are rattling financial markets. Last Monday, lockdown fears prompted the Dow Jones Industrial Average’s worst day in almost nine months.5

“The key risk that higher inflation will continue to be accompanied by high unemployment is that the Delta variant might spread rapidly both at home and abroad,” Lachman wrote. “Underlining this risk are the facts that this variant is much more infectious than the earlier COVID strains and that the vaccines seem to be less effective in protecting the vaccinated public against this particular strain than against the original strain.”

Even without a potential Delta variant complication, a steady reduction in unemployment toward pre-pandemic levels has proven elusive, to say the least. The drop from April 2020’s 14.8% rate – the highest since the Great Depression – had been moving at a decent clip until the rate fell into the 6’s toward the end of last year.6 Since then, subsequent reductions have been far more gradual, and the rate has even crept back up: June’s 5.9% unemployment rate actually was 0.1% higher than May’s rate, underscoring Federal Reserve Chairman Powell’s continuing concerns about the unemployment level, in general.

Recovery? Consumer Confidence Hits Five-Month Low

There’s yet another ominous sign about the condition of the supposedly recovering economy. According to the most recent University of Michigan consumer confidence survey, consumer sentiment unexpectedly dropped from 85.5 in June to 80.8 in July – a five-month low.7

For those unfamiliar with it, the Michigan Consumer Sentiment Index (MCSI) is a formal monthly survey of consumers designed to gauge their feelings about the health of the economy and their own personal financial circumstances. Its significance is that the index is a component of the broader Conference Board Leading Economic Index, which is a leading U.S. economic indicator used to project economic conditions in the near term.

In a statement about the sudden drop in consumer sentiment, survey director Richard Curtin said, “Inflation has put added pressure on living standards, especially on lower and middle income households, and caused postponement of large discretionary purchases, especially among upper income households.” Curtin added that “consumers’ complaints about rising prices on homes, vehicles and household durables” hit a survey record in July. As a matter of fact, consumer views on buying conditions for both vehicles and houses fell to their lowest level since 1982.

In a recent article for Asia Times discussing the stagflation possibility, economist David P. Goldman described the July MCSI data as “worrying,” and I think he’s right.8 If inflation becomes a full-fledged problem, unemployment remains stuck at a level nearly 60% higher than pre-pandemic levels, and the consumer outlook continues to sour to a degree that Americans move to delay purchases of big-ticket items, it will be difficult to argue against the stagflation narrative that’s gaining strength right now.

Gold and Silver Both Surged in Stagflationary 1970s

Before the 1970s, inflation and unemployment were seen as having an inverse relationship. Low or no inflation tends to signal economic anemia, of which higher unemployment would seem a natural function. Conversely, with higher inflation historically being a sign of more robust output, it would be appropriate to see low unemployment in that environment.

Then, in the 1970s, complicating factors – including the energy crisis – conspired to shoot holes in the reliability of that inverse relationship. In the end, the decade was marked by two recessions, a difficult-to-manage unemployment rate, and high inflation.

The silver – and gold – lining to the economically miserable 1970s was the performance of precious metals. From January 1970 to January 1980, gold and silver appreciated roughly 1,500% and 2,100%, respectively.

It remains to be seen if the burgeoning inflation we’ve seen recently really will morph into stagflation. The COVID-19 Delta variant could be the wild card in all of this. But even without the Delta variant becoming a bigger issue for the economy, unemployment is proving a challenge and inflation continues to surprise and worry observers by continuing to rise.

If consumer sentiment continues to deteriorate, the overall economic environment could become even dicier. Retirement savers worried about inflation and more generally a persistently “soft” economy might see adding gold and silver to their asset base as one way to help mitigate any potential damage.



1 Howard Schneider and Lindsay Dunsmuir,, “Fed’s Powell keeps to script on jobs recovery, feels heat on inflation front” (July 14, 2021, accessed 7/22/21).
2 Kimberly Amadeo, The Balance, “US Inflation Rate by Year from 1929 to 2023” (March 1, 2021, accessed 7/22/21).
3 Kimberly Amadeo, The Balance, “Unemployment Rate by Year Since 1929 Compared to Inflation and GDP” (March 16, 2021, accessed 7/22/21).
4 Desmond Lachman, The Hill, “The return of stagflation?” (July 12, 2021, accessed 7/22/21).
5 Stephen Culp,, “Wall Street ends sharply lower as Delta COVID variant sparks new lockdown fears” (July 19, 2021, accessed 7/22/21).
6 U.S. Bureau of Labor Statistics, “Unemployment Rate” (accessed 7/22/21).
7 Jordan Yadoo, Detroit News, “U.S. consumer sentiment down, University of Michigan index shows” (July 16, 2021, accessed 7/22/21).
8 David P. Goldman, Asia Times, “Fed worries that inflation will become stagflation” (June 22, 2021, accessed 7/22/21).









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