The Commerce Department’s report on first-quarter gross domestic product bears all the tell-tale signs of stagflation and makes a Federal Reserve interest rate hike all but inevitable, Breitbart Economics Editor John Carney said a Thursday interview with Fox Business host Larry Kudlow.
Kudlow called Thursday’s GDP report “the worst of both worlds” with “low growth and sticky high inflation.”
“It was a very bad report,” Carney agreed. “Businesses pulled back on investing. Inventories came way down, and yet consumers kept spending. So, Larry, pop quiz: What happens when you have lower production and more demand? Inflation goes up.”
“This is an inflationary and, frankly, a stagflationary report,” he continued. “We’re seeing the beginning of a contraction because businesses are worried about the looming recession. They can see the leading indicators. They can see the yield curve. They know the recession is coming. They’re not willing to invest. But consumers keep spending. So, inflation goes up. And so, we’re not getting any relief on the inflation.”
“How long will consumers keep spending?” Kudlow asked. “Because if businesses are contracting, that’s not good. Eventually wages will come down; people will be laid off. Unemployment claims—I know they were okay today, but they had been edging higher. Can’t last forever.”
“No, it can’t last forever,” Carney replied. “But it could last longer than anybody thinks.”
He pointed specifically to the very strong labor market data showing that jobless claims went back down instead of up.
“That labor market strength is going to continue to feed consumption,” Carney explained. “And, frankly, all of the more recent data—the real time indicators, things like credit card spending—indicate that consumers are still going out there and they’re still spending.”
As Carney wrote in Thursday’s Breitbart Business Digest:
From the perspective of the Federal Reserve, the first quarter GDP report provides no evidence of relief from inflation. If anything, it is a stagflationary report. Businesses produced fewer goods, as evidenced by inventories, while consumers purchased more. That’s the opposite outcome the Fed was looking to achieve.
Kudlow noted that all of this indicates that the Federal Reserve will have to keep raising interest rates to reach its two percent inflation target.
“That’s right,” Carney agreed. “The Fed can’t look at this report and say, ‘We can back off.’ They’re going to look at it and say, ‘That’s it. We’ve got to keep raising rates.’ And frankly, some of the things that brought down GDP in the first quarter are probably going to start adding to it. Housing has started to recover. That inventory drawdown is unsustainable given how many how much shopping people did.”
“The Fed is not going to like seeing growth go back up. They want it to come down,” Carney concluded.
Kudlow quipped that if Federal Reserve Chairman Jerome Powell “had a backbone,” he would publicly support House Speaker Kevin McCarthy’s debt ceiling bill to rein in spending because less government spending will help Powell fight inflation.
Powell could do this “very subtly,” Carney explained. “He could say, look, the country faces a choice. It needs to have some sort of pullback. To get inflation under control, either fiscal authorities have to act responsibly, or the Federal Reserve will do so. Either interest rates are going up to six or seven percent, or we have to pull back on some of this out-of-control deficit spending.”
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