Yellen, speaking to reporters ahead of a G-7 finance ministers meeting in Germany, acknowledged the hardships caused by high inflation.
“The economic outlook globally is challenging and uncertain, and higher food and energy prices are having stagflationary effects, mainly depressing output and spending and raising inflation all around the world,” she announced throughout comments that covered inflation, Russia’s war in Ukraine, and energy prices.
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Yellen’s invocation of stagflation is notable, as it is seen as one of the worst economic scenarios that could play out. Stagflation, a portmanteau of stagnation and inflation, is when inflation is increasing at the same time that economic growth and the labor market are struggling.
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The term is often employed to describe the economy of the 1970s when both inflation and unemployment were high. At the time, many top economists thought such a situation was impossible, as it was thought that high inflation could be traded off for lower unemployment.
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At 8.3% in April, annual inflation as measured by the consumer price index is the highest it has been since that 1970s episode, often called the Great Inflation.
Unemployment is still extremely low, by historical standards, at 3.6% as of April. And several other economic indicators, like industrial production, suggest that the economy is expanding.
The Federal Reserve has started hiking interest rates in response to the explosive inflation, with the first-rate target hike, a quarter percentage point, announced in March. Earlier this month, the Fed declared that it would increase its interest rate target by a half percentage point, an aggressive tack last taken more than two decades ago.
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There are fears that the sharp turn toward tightening and a hawkish monetary policy could throw the United States into a recession and cause economic growth to stagnate — illustrating the concerns regarding stagflation should prices remain stubbornly high.
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Regarding the war in Ukraine, which is top of mind at this week’s G-7 meeting, Yellen acknowledged that the U.S. and allies knew there would be spillover economic effects from the West’s sanctions regime. However, she stated they are working to guarantee the sanctions have a “minimum negative impact” on the global economy.
While Americans should not expect any immediate relief at the gas pump, increases in the global oil supply should eventually generate long-term relief, Yellen explained.
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