Stagflation rocked the economy before. Is it coming back?

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Mention the word “stagflation” to someone who followed the economy in the 1970s, and you can expect a strong reaction.

The phenomenon — which describes a period of high inflation and stagnant economic growth — was a nightmare for policymakers, leaving them with few options to rein in runaway prices without damaging the economy. Federal Reserve Chair Paul Volcker was ultimately forced to jack up interest rates to unprecedented levels to get inflation under control.

Now for the bad news: Decades later, talk of stagflation is back.

“One can make a case that ‘mild’ stagflation is already underway,” the economist Nouriel Roubini wrote in a recent column. “Inflation is rising in the United States and many advanced economies, and growth is slowing sharply, despite massive monetary, credit, and fiscal stimulus.”

Roubini has been dubbed “Dr. Doom” for his dark predictions about the economy. But the thrust of his point stands. In the United Kingdom, inflation rose at the fastest rate in at least 24 years in August. In the United States, consumer prices rose 5.3% for the year ended in August and 0.3% compared to July. That was better than recent months, but well above pre-pandemic norms.

Meanwhile, economists have been downgrading predictions for economic growth as they assess the impact of the highly contagious Delta variant of the coronavirus, which arrives as some stimulus measures start to wind down.

A prolonged period of stagflation is still not the baseline assumption among economists and Wall Street investors.

“Is that a permanent state, or is [it] more related to frictions around reopening? I think most of it is temporary,” Neil Shearing, group chief economist at Capital Economics, told me.

But there is reason to pay close attention to what’s unfolding. Although the Federal Reserve also maintains that recent inflation is transitory, and will pass once post-pandemic supply chain pressures and labor market disruptions ease, consumers are exhibiting growing anxiety.

Last week, the Federal Reserve Bank of New York released its latest survey of consumer expectations. It found that inflation expectations for the year ahead were at a record high, as were those at the three-year horizon. The data goes back to 2013.

Breaking it down: Economists closely watch inflation expectations because they could encourage workers to demand higher wages. If consumers are paid more, their purchasing power grows, and businesses may hike prices again — starting the entire cycle anew.

In a recent note to clients, Bank of America strategists Ohsung Kwon and Savita Subramanian also flagged concerns about energy prices. The 1973 oil crisis is widely seen as having exacerbated inflation problems.

“Although not our base case, stagflation has often been accompanied by oil shocks, and with crude prices recently jumping on supply chain disruptions, the risk of oil shocks has increased,” Kwon and Subramanian said.

What happens next: The economy is showing some signs of resilience in the face of the Delta variant. But Kwon and Subramanian are advising clients to consider stocks with healthy dividends and shares of smaller companies that are more protected from inflation.

Those in charge of managing the economy, meanwhile, must weigh a complex matrix of factors. Officials at the Federal Reserve and the Bank of England, who will meet this week, have to decide whether to stick to their assessment that the problem is fleeting.

That would allow them to start pulling back crisis-era support in an orderly fashion. But as stagflation chatter grows, these decisions won’t be easy.

“It’s going to be an uncomfortable few months for central banks,” Shearing said.

Catch up on the WSJ’s blockbuster Facebook investigation

Last week, the Wall Street Journal released a series of damning articles about Facebook (FB), citing leaked internal documents that detail in remarkably frank terms how the company is not only well aware of its platforms’ negative effects on users, but also how it has repeatedly failed to address them.

There’s a lot to unpack from the Journal’s investigation. But one thing that stands out is just how blatantly Facebook’s problems are documented, using simple, observational prose not often found in internal communications at multinational corporations, my CNN Business colleague Allison Morrow writes.

She’s combed through the series and identified some highlights.

On teen health: In the Journal’s report on Instagram’s impact on teens, reporters cite a slide deck from Facebook’s own researchers.

“We make body image issues worse for one in three teen girls,” said one slide from 2019, according to the WSJ. Another reads: “Teens blame Instagram for increases in the rate of anxiety and depression … This reaction was unprompted and consistent across all groups.”

Facebook’s whitelist: Facebook CEO Mark Zuckerberg has repeatedly, publicly maintained that Facebook is a neutral platform that puts its billions of users on equal footing. But in another report on the company’s “whitelisting” practice — a policy that allows politicians, celebrities and other public figures to flout the platform’s rules — the WSJ found a 2019 internal review that called Facebook out for misrepresenting itself in public.

“We are not actually doing what we say we do publicly,” the review said, according to the paper. “Unlike the rest of our community, these people” — those on the whitelist — “can violate our standards without any consequences.”

Getting angrier: In 2018, Zuckerberg said a change in Facebook’s algorithm was intended to improve interactions among friends and family and reduce the amount of professionally produced content in their feeds. But according to the documents published by the Journal, staffers warned the change was having the opposite effect.

A team of data scientists put it bluntly: “Misinformation, toxicity and violent content are inordinately prevalent among reshares,” they said, according to the Journal’s report.

Scrolling on your couch? The full investigation is more than worth your time.

Up next

Monday: NAHB Housing Market Index

Tuesday: OECD economic outlook; US building permits and housing starts; AutoZone (AZO), Adobe (ADBE), FedEx (FDX) and Stitch Fix (SFIX) earnings

Wednesday: Bank of Japan and Federal Reserve policy decisions; US existing home sales; General Mills earnings

Thursday: Bank of England policy decision; Darden Restaurants (DRI), Rite Aid (RAD), Nike (NKE) and Costco (COST) earnings; US initial jobless claims

Friday: New US home sales