Stagflation Risk: Stephen Roach Latest Economist to Sound Alarm on ‘70s-Style Inflation

'One supply chain glitch away from stagflation,' he says

A customer prepares to pump gas at a Shell station in San Francisco on July 12, 2021. Justin Sullivan/Getty Images

Stephen Roach is the latest high-profile economist to sound the alarm on the risk of the United States facing 1970s-style stagflation—where economic growth falls, but inflation stays stubbornly high.

The former Morgan Stanley Asia chairman told CNBC on Sept. 29 that the energy price spike is inflicting major damage to struggling supply chains and that he believes that the United States is “one supply chain glitch” away from a ‘70s-era bout of stagflation.

His remarks come as gasoline stations are running dry in the UK, power costs are surging in the EU ahead of winter, and prices for oil, natural gas, and coal are rising.

In the interview, Roach spoke of supply chain bottlenecks shifting from one part of the supply chain to another rather than easing, a situation he called “strikingly reminiscent of what we saw in the early 1970s” and one that “suggests that inflation will stay at these elevated levels for longer than we thought.”

“We were sort of one supply chain glitch away from stagflation,” Roach said. “That seems to be playing out, unfortunately.”

Roach took aim at the Fed’s easy money policies, arguing that they were excessive, particularly in the face of persistent inflationary pressures.

While Fed officials have maintained that the current bout of inflation is temporary and will abate once supply chain dislocations abate, they’ve increasingly started to acknowledge that inflation has been stickier than previously thought.

“This is not a situation that we have faced for a very long time, and it is one in which there is a tension between our two objectives. ... Inflation is high and well above target, and yet there appears to be slack in the labor market,” Federal Reserve Chair Jerome Powell said at a European Central Bank forum, with his remarks appearing to point to a stagflationary dynamic.

Surging prices have been a headline theme amid the economic recovery, rising faster than wages and eroding the purchasing power of Americans.

Core personal consumption expenditures (PCE) inflation, which excludes the volatile categories of food and fuel and is the Fed’s preferred gauge for price growth, has risen sharply in recent months, well above the central bank’s 2 percent target.

In April, core PCE was 3.1 percent, rising to 3.5 percent by May and 3.6 percent in June and July, according to the latest months of available data from the Commerce Department.

While Fed officials have expressed concern about price pressures, they predict that the high rate of inflation is a transitory phenomenon. Still, they acknowledge that there’s a risk that price pressures will be stickier than previously anticipated.

New York Federal Reserve Bank President John Williams said on Sept. 27 that consumer expectations for what the rate of inflation will be several years down the road remain “well-anchored” at around the Fed’s 2 percent objective, though he said there are upside risks and a “great deal of uncertainty” around the inflationary outlook.

Economist Nouriel Roubini, known for his gloomy-yet-accurate forecast of the 2008 financial crash—a prediction he made at a time of peak market exuberance—warned in a recent op-ed that the global supply chain crisis, combined with high debt ratios and ultra-loose monetary and fiscal policies, threatens to turn the “mild stagflation” of recent months into a full-blown stagflationary crisis.