Omicron Variant Resurrects the Risk of U.S. Stagflation
Faster inflation is a given. Now economic growth faces greater challenges.
Last week’s economic and Covid-related news may well resurrect a risk narrative that makes policy makers and virtually all financial markets particularly anxious: U.S. stagflation, that awful combination of rising inflation and declining growth.
How this risk plays out in the next few months, however, is less than certain, though not because of the inflation component, whose continued upward movement is a near certainty. The bigger question is the growth component, where the underlying private sector drivers, while still solid enough on a stand-alone basis to power through another Covid disruption, could face potentially stronger headwinds because of the mounting risk of a policy mistake and tighter financial conditions in markets.