I put the definition there to show that in the current environment, it is very difficult to meet the conditions for a stagflationary environment. Employment has been strong throughout this period of rising interest rates and high inflation. This has given rise to the belief that a soft landing might still be possible. The US Federal Reserve has a dual mandate of tackling inflation and growth, so will be monitoring employment despite the current primary focus on dealing with inflation.
We simply do not know whether the impact of the aggressive rate hikes we have seen so far this year will ultimately result in a recession and higher unemployment.
What we can say though is that the risk of stagflation (higher unemployment and lower growth combined with high inflation) has risen, with perhaps a higher risk in Europe given the weaker economic environment.
We should begin to see the impact of rate rises on the overall economy in the middle of next year, and inflation will need to have dropped rapidly from its current levels without increasing speculation of stagflationary risks, the effects of which would be negative for risk assets.
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