&imwidth=800&imheight=600&format=webp&quality=medium "Iran war fuels US stagflation fears as inflation rises to 3.7% and gas prices surge")
The Iran war has increased economic pain in the US, as headline inflation has risen 0.6 per cent from March and for the annual rate has climbed to 3.7 per cent. The energy price shock has pushed the retail gas price in the US to $4.58 per gallon. For the first time in three years, US wage growth is 3.6 per cent has fallen below the headline inflation rate. Brent Crude is trading at $107.6 per barrel.
US is looking at a period of stagflation
Economist Ray Dalio has warned of a period of stagflation in the US as well as globally. The inflation forces the Federal Reserve to maintain interest rates, whereas inflation has remained stubbornly stuck between 2 per cent and 4 per cent since 2023. A record 55 per cent of US citizens claim that the economy is deteriorating. According to a Gallup survey, affordability reigns as the dominant financial concern for Americans. While some economists claim that the US has been facing stagflation for some time, now the ugly combination of inflation and recession maximises the pain.
“We’re certainly in a stagflationary period,” Dalio said. “How that transpires has a lot of parts to it, but we’re certainly in that.”
Political Pressure
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The outgoing Fed Chair Jerome Powell will likely be replaced by Kevin Warsh, a Trump nominee who is known for his hawkish nature, but will likely reposition himself to align with Trump’s preference for low rates. Trump faces midterms in the first week of November and is looking to rally his red heartland support, particularly as his campaign has focused on lowering costs. A rate cut will be a high-risk move that could further accelerate price increases. It will provide temporary relief but put the country in a loop of inflation, as energy prices stay high and people will have more money than the available resources, which will weaken the dollar compared to other available currencies. If Warsh implements a regime change policy, this will significantly hurt his credibility. “Everyone’s going to look at how he behaves,” said Dalio to CNBC, “The Federal Reserve would lose its credibility,” he said.
