Stagflation fears — a triple threat of stalling growth, persistent inflation, and rising unemployment — are gripping economists' forecasts ahead of the release of February's Consumer Price Index (CPI) reading this Wednesday, March 12.
Yahoo Finance senior reporter Alexandra Canal reviews the large swatch of current economic conditions ahead of tomorrow's latest inflation reading and the Federal Reserve's latest interest rate decision next week.
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After optimism about a possible soft landing, Wall Street is now considering a different term, stagflation. Who better to break down what that means ahead of tomorrow's inflation reading than Yahoo Finance Senior Reporter Alexandra Canal. Hey, Ally.
Hey, Julie. That's right, stagflation fears are now spooking markets. And if you haven't heard that term before, spoiler alert, it ain't pretty. So essentially, stagflation is a bleak economic scenario in which growth stalls, inflation persists, and unemployment rises. Now, we did see a slight uptick in the unemployment rate for the month of February, but it's really the growth story that economists have been focused on in recent weeks. And to that point, we've seen some pretty prominent Wall Street firms slashing their GDP targets for 2025. We have Goldman Sachs now at 1.7%, Morgan Stanley at 1.5%. Previously, they were hovering at just around 2%. So that's a big reason why you're seeing stocks sell off. Now, recent data points have also shown some stagflationary pressures underneath the surface. You take a look at something like year-over-year wage growth. We saw that coming in at 4% for the month of February. Now, that is lower from the 4.1% that we saw in January, but still pretty sticky prices, and we've been hovering around these levels for the past several months. And then last week, we saw the prices paid index in the ISM's manufacturing PMI report come in at the highest level since June 2022, while new orders fell. And that data arrived on top of bleak consumer survey results. So it's really just been this consistent drumbeat of pessimistic data points. And that all leads us to tomorrow's Consumer Price Index report. Now, economists expect core CPI to come in at 3.2%, headline CPI 2.9%. Now, this is both each category of moderation from what we saw during the month of January, but still, sticky prices above the Fed's 2% inflation target. And that's why economists have been pretty cautious to price in any further easing from the Fed this year. Bank of America anticipates no cuts to come. Mohamed El-Erian, he said a similar thing on our air earlier this week. That hasn't stopped markets though from pricing in some easing. Traders do expect about 75 basis worth of basis points worth of cuts. That implies three cuts to come this year. That would bring the fed funds rates down to a range between 3.5 to 3.7%. So just around here if we get those cuts. Of course, a lot of people don't think that's going to be because inflation is moderating. They think it's going to be because the jobs picture would unravel and growth would stall. So a lot riding on tomorrow's print. Josh, I'm going to send it back to you.
Thank you, Ally.