A brief period of stagflation
The five-year breakeven — the spread in interest rates between ordinary U.S. government bonds and inflation-protected bonds that are indexed to consumer prices
Investors appear to believe that we’re only going to have a year or so, if that, of elevated inflation, and after that we’ll be back to roughly the Fed’s long-run target of 2 percent inflation
Inflation, once it has become entrenched in expectations, can become self-perpetuating; the only way to bring it down is to engineer an extended period in which demand falls short of supply — that is, a recession.
Because it will take a while for inflation to fully reverse its rise, there’s a good chance that we’ll see a brief period of economic stagnation combined with continuing inflation — stagflation.
And sooner than many people believe, the Fed may find itself reversing course, trying to undo the “stag.”
Paul Krugman 1 July 2022
Opinion | Wonking Out: Taking the ‘Flation’ Out of Stagflation - The New York Times (nytimes.com)
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