Inflation vs. Stagflation: A Distinction Without a Difference?

For the better part of the last decade, interest rates have been near zero and leverage has driven asset prices higher. Meanwhile, wage gains remained stubbornly low. The economy was not strong enough for the Fed to raise rates and shrink the money supply, but inflation looked to be inevitable nonetheless. Even so, banks were not increasing consumer lending. Fortunately, the stagflation scenario predicted as imminent by some economists never quite came to pass… at least not yet.

Today, after a brief dance with economic disaster, a realignment of the economy, coinciding with a variety of one-off events (supply chain disruptions, the Ukrainian war, and a labor supply shortage), has driven core inflation to levels not seen since the early 1980s. The Fed has raised rates three times already in 2022 and is signaling several more aggressive rate increases over the rest of the year. In a matter of 12 months, they seem to have gone from worrying that reducing economic stimulus might create a problem they could not control to worrying that the problem they cannot control now requires an aggressive reduction of that very same economic stimulus.

What we find interesting is that the current state of inflation, on the surface, appears to be the result of a series of seemingly one-off scenarios, and that may very well be the case. However, if one looks closer, patterns begin to emerge. For example, let us consider the war in Ukraine. There is no shortage of uncertainty facing the United States as a result of the Russian invasion. But what may not have been properly vetted yet is the broader risk to globalization that this war represents. It has been notable that the U.S. government believes that it can wage a shadow war on the Russian economy and Putin’s finances as a way to engage in the conflict for the benefit of Ukraine without engaging by sending soldiers to fight. The way they have done this is by shaming and/or sanctioning those who do business with Russia and expanding those policies slowly to those who do business with countries who align with Russia.

More and more, companies are being highlighted by people not affiliated with official U.S. policy for their willingness (or lack thereof) to withdraw from their business activities in the offending countries. A professor at Yale went so far as to publish a list of companies with Russian business interests, updated regularly to show who has or has not taken action. This list has galvanized a variety of people and organizations to take matters into their own hands and apply pressure to those companies.

To us, this is just the start of what could be something very big. We expect companies to start taking a closer look at even the smallest risk of being perceived as morally questionable. With branding in the 21st century being so closely tied to public perception, and with technology enabling such efficient citizen activism, the reality is that companies will need to imagine all sorts of unlikely scenarios to avoid risks, however small, before it is too late.