Remember the 1970s? Writer Tom Wolfe coined the term “Me Decade” to describe those years of disillusionment and narcissism. It was an era known for annoying music (disco), tacky clothing (polyester leisure suits), and an economic vise called “stagflation.”

Stagflation describes a combination of stagnant economic growth and rising inflation. It’s the worst of both worlds.

America’s “Great Inflation” reached a peak of more than 14% in 1980. It took cigar-chomping Federal Reserve Chair Paul Volcker and his draconian interest rate hikes during the early 1980s to finally curb inflation. The cost of Volcker’s accomplishment, however, was the crushing recession of 1980-1982.

The unemployment rate peaked at 10.8% in 1982. That’s more than three times as many unemployed Americans as in 1969, when the unemployment rate was 3.4%.

Today’s unemployment rate is 3.8%, the lowest since, well, 1969, when Richard Nixon was in the White House, Neil Armstrong walked on the moon, and an X-rated film called “Midnight Cowboy” won the Oscar for Best Picture.

Stagflation is a major reason why millions of Americans lost their jobs in the 1970s. It’s also why President Jimmy Carter lost his job to Ronald Reagan. Accordingly, the Biden administration can’t be very pleased with the latest economic numbers, as the 2024 presidential election heats up. Comparisons to Carter are the political kiss of death.

Stagflation redux?

In a development that almost no one saw coming, stagflation has edged back into the conversation about the economy and markets. It’s a shock to discuss stagflation when all signs had pointed to a “soft landing.” The mood on Wall Street has darkened.

On Friday, the Bureau of Economic Analysis (BEA) released the latest numbers for the Federal Reserve’s favorite inflation gauge, the personal consumption expenditures price index (PCE). The numbers aren’t terrible, but they’re worrisome nonetheless.

The “core” PCE excluding food and energy jumped 2.8% from a year ago in March, the same as in February. That exceeded the 2.7% consensus estimate. Including food and energy, the all-items PCE price gauge increased 2.7%, compared to the 2.6% estimate.

On a monthly basis, both measures increased 0.3%, as expected and in line with the increases from February.

Consumers are still hanging tough and keeping their wallets open, despite elevated inflation and interest rates. Personal spending rose 0.8% on the month, slightly higher than the 0.7% estimate. Personal income increased 0.5%, in line with expectations and higher than the 0.3% increase in February.

This disheartening data followed BEA data released Thursday that PCE in the first quarter of 2024 accelerated at a 3.4% annualized rate, its biggest gain in a year. U.S. gross domestic product (GDP) increased only 1.6%, well below expectations.

Inflation is not heading in the right direction. The three-month annualized change in core PCE increased 4.4% in March, up from 3.7% in February (see chart).

The Fed pays particular attention to the PCE because it adjusts for changes in consumer behavior and places less weight on housing costs than the more widely known consumer price index (CPI).

While they scrutinize both headline and core PCE measures, Fed officials focus on the ex-food and energy figure because it provides a more balanced look at long-term, underlying trends. Food and energy tend to be volatile and thus skew the readings.

PCE services prices in March rose 0.4% on the month while goods were up 0.1%, reflecting the transition to post-COVID conditions. During the early days of the pandemic, when service establishments were locked down, goods inflation dominated. Food prices actually showed a 0.1% decline on the month while energy rose 1.2%.

On a 12-month basis, services prices were up 4% while goods only increased 0.1%. Food was up 1.5% while energy gained 2.6%.

These PCE numbers certainly aren’t on a par with the Carter years, but they serve as a reminder that inflation is far from vanquished. We’re also unlikely to see a severe recession reminiscent of the early Reagan administration, but by the same token, the Fed has new justification to take a more hawkish stance. The narrative of three rate cuts, starting in June, is deader than disco.

The days of leisure suits won’t make a comeback, but stay vigilant all the same. Inflation is far from contained.

That said, the main U.S. stock market indices rebounded on Friday, closing higher as follows:

• DJIA: +0.40%
• S&P 500: +1.02%
• NASDAQ: +2.03%
• Russell 2000: +1.05%

Bond yields edged lower. Favorable earnings results from Big Tech helped restore some confidence to Wall Street.

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John Persinos is the editorial director of Investing Daily.

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