World Bank warns of toxic stagflation, Janet Yellen says US inflation is at ‘unacceptable levels’

The World Bank has warned of a nightmare scenario of 1970s style stagflation and recession in some countries, because of the COVID-19 pandemic and the war in Ukraine.  

In its latest Global Economic Prospects report, the World Bank said the Russian invasion of Ukraine has magnified the slowdown in the global economy and “a protracted period of feeble growth and elevated inflation” could become reality, raising the risk of stagflation. 

The bank forecast that global growth is expected to slump from 5.7 per cent in 2021 to 2.9 per cent this year, down from its 4.1 per cent growth forecast in January. 

Growth is forecast to hover around 2.9 per cent over 2023-24 as the war in Ukraine disrupts activity, investment and trade, demand fades, and government and central bank stimulus is withdrawn. 

“Markets look forward, so it is urgent to encourage production and avoid trade restrictions. Changes in fiscal, monetary, climate and debt policy are needed to counter capital misallocation and inequality.”

‘Unacceptable inflation’

US Treasury Secretary Janet Yellen told the US Congress that North America was facing “unacceptable levels of inflation”.

She was also forced to defend her previous comments that rising prices were “transitory”.

Ms Yellen said she regretted the comments and said that inflation was the “top economic problem at this point.” 

“I was not envisioning impacts on food and energy prices we’ve seen from Russia’s invasion of Ukraine.”

The Australian dollar regained ground overnight to rise by two-thirds of a per cent to around 72.32 US cents at 6:50am AEST. 

It shot up above 72 cents yesterday after the Reserve Bank raised official interest rates by a bigger than expected 0.5 per cent to 0.85 per cent. 

Later this week, the European Central Bank is expected to raise rates as well. 

The local share market is set to rise with the futures index, the ASX SPI 200 index, up 0.6 per cent to 7,146, after the market slumped yesterday after the rate rise. 

Spot gold was buying around $US1851.73 an ounce, up 0.6 per cent, while Brent crude rose above $US120 a barrel, up 1 per cent to $US120.65 a barrel. 

Wall Street gains

US stocks rose after a choppy session on hopes that global inflation may be peaking. 

The Dow Jones index rose 0.8 per cent to 33,180, the S&P500 gained nearly 1 per cent to 4,160, and the Nasdaq Composite rose 0.9 per cent to 12,175. 

Retailer Target (-2.3pc) said it will take a short term hit to profits as it cancels orders and marks down unwanted products to clear room for groceries and back to school supplies. 

Target cut its quarterly profit margin forecast after seeing a steep drop in quarterly profit in May. 

Its profit warning was seen by investors as having a dampening impact on inflation and could help the US central bank and other central banks fight surging price rises, without sharply increasing interest rates and leading to an economic slowdown. 

“Target cuts both ways. On the one hand, obviously it’s negative news for Target. But on the other it’s one of the first large signals that inflation may be peaking,” said Rick Meckler, a partner at Cherry Lane Investments.

 “Of course, this is the scenario of a soft landing. That we raise rates, that it reins in inflation some, but it doesn’t stop the economy,” he said.

British prime minister Boris Johnson survived a no-confidence vote, but the thin margin of victory prompted speculation that he would be replaced, which saw the pound and UK bonds fall. 

The FTSE 100 index fell 0.1 per cent to 7,599, the CAC 40 in Paris fell 0.7 per cent to 6,500, and the DAX in Germany down 0.7 per cent to 14,557.

ABC/Reuters