- Commentators have warned that the war in Iran could spark stagflation.
- Yet, economist David Rosenberg doesn't think it's a risk.
- Higher oil prices are more likely to cause inflation to crash and the economy to slow by year's end, he said.
Stagflation talk is picking up on Wall Street again, but one top economist says it isn't in the cards. Unfortunately, that's because he sees the economy slowing to the point where inflation craters.
Stagflation, a troublesome mix of high inflation and low economic growth, was in the air this week as the Iran war sent oil prices surging.
David Rosenberg, the president of Rosenberg Research, waved off the prospect, though, as he thinks it's more likely that inflation will plummet by the end of the year. That's because higher oil prices will likely push the US economy into a cost-squeeze, a phenomenon where high prices cause consumers to pull back spending, eventually sending prices in the opposite direction, he told Business Insider in an interview.
"I think we're going to get inflation running up in the next few months and it's going to come crashing down by the end of the year," Rosenberg said.
"This shock to demand that we're seeing right now is going to make inflation come down even more by the end of the year than if we hadn't had it," he added.
US investors dumped stocks and bonds this week amid concerns that higher oil prices could eventually seep into consumer prices.
Brent crude, the international benchmark, soared 9% to top $92.80 a barrel on Friday as markets digested as the market saw the war continuing.
April contracts for West Texas Intermediate crude, meanwhile, rose more than 13% to top $91.31 a barrel, its highest level since September 2023.
The spike has drawn comparisons to the oil shocks of the 1970s, when inflation spiraled and sent the US into a stagflationary downturn.
While the US could see a small burst of stagflation due to the short-term impact of higher oil prices, Rosenberg thinks the aggregate hit to demand will outweigh any inflationary impact over time.
A few things explain why:
- Inflation is on a long-term cooling trajectory. The economy has flashed several signs inflation is cooling for the long run — and will likely continue to do so despite the uptick in energy prices.
Rosenberg pointed to the M2 money supply, a measure of the stock of money in the economy that feeds into inflation. M2 money supply growth has stagnated at around 4% for the past year, according to Fed data.
- The Fed won't rescue markets. The central bank has made it clear it's planning to hold interest rates steady to keep inflation expectations anchored. Despite the spike in crude prices, markets are still pricing in just two or three more rate cuts by the end of the year, according to the CME FedWatch tool.
- Real incomes have taken a hit. Wage growth, when adjusted for productivity, is also growing at around a 1% yearly pace, about half of what it was a year ago, Rosenberg said.
Economic growth is slowing. Real GDP growth is also slowing. The economy expanded at an annualized 1.4% pace over the fourth quarter, according to the Bureau of Economic Analysis, down significantly from its highs in recent years.
"What's going to happen is that this massive cost-push squeeze on real incomes and purchasing power is going to cause disinflation or deflation in other parts of the economy. So that's what people miss," Rosenberg said.
While the prospect of falling inflation seems counterintuitive to the fears currently roiling markets, the economy has experienced similar situations in which inflation plummeted after oil prices soared.
Rosenberg pointed to when oil spiked following Russia's invasion of Ukraine, which led headline inflation to peak at around 9% in the summer of 2022. Price growth, though, quickly cooled over the next year as consumers pulled back and the Fed raised interest rates.
Oil prices also spiked to around $150 a barrel during the summer of 2008, right as the economic slowdown was picking up steam. In the third quarter of that year, headline inflation dropped to 2.6% for the third quarter, down from the prior quarter's 7.9% growth, according to the Bureau of Labor Statistics.
"Those are the fundamentals and everything else, including the oil price, is just background noise," Rosenberg said.
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