Photo: Morgan Stanley
While the world worries about inflation or deflation, Morgan Stanley believe their is another specter out there ready to haunt markets: stagflation.Their opinion is that right now, the global monetary environment looks a lot like the 1970s, where high levels of liquidity forced OPEC to raise oil prices causing high inflation and low growth in the global economy.
Their findings also show great differences between the two time periods, including the flexibility of oil prices, and high U.S. unemployment.
But what’s more worrying are the similarities. With quantitative easing 2 in place, global monetary policy is extremely loose, driving inflation, especially in emerging markets. If oil prices were to spike to catch up the result could be stagflation, as high oil prices limit global growth.
Nevertheless, the comparison is interesting and worth evaluating.