Short term Elliott Wave view in EURJPY suggests that rally to 165.35 ended wave 3. Wave 4 pullback unfolded as a double three Elliott Wave structure. Down from wave 3, wave ((w)) ended at 162.59 and wave ((x)) ended at 165.17. Down from there, wave (w) ended at 163.85 and wave (x) ended at 164.69. Wave (y) lower ended at 162.26 which completed wave ((y)) of 4 in higher degree. Pair has turned higher in wave 5.

Up from wave 4, wave (i) ended at 163.15 and wave (ii) dips ended at 162.62. Wave (iii) higher ended at 164.12, wave (iv) ended at 163.79, and wave (v) ended at 164.43 which complete wave ((i)). Pair then pullback in wave ((ii)) towards 163.6. Pair has resumed higher again afterwards in wave ((iii)). Up from wave ((ii)), wave i ended at 164.25 and wave ii ended at 163.66. Wave iii ended at 164.67 and wave iv ended at 163.69. Expect wave v to end soon which should complete wave (i). Pair should then pullback in wave (ii) to correct cycle from 4.15.2024 low before it resumes higher. Near term, as far as pivot at 162.26 low stays intact, expect pair to find buyers in any dip in 3, 7, 11 swing for further upside.

EURJPY 45 Minutes Elliott Wave Chart

EURJPY Elliott Wave Video

https://www.youtube.com/watch?v=MjuN2cuWfNI

Australia NAB Quarterly Business Confidence rose from -6 to -2 in Q1. Business Conditions was unchanged at 10. In terms of forward-looking expectations, businesses anticipate a slight downturn in conditions over the next three months, with expectations dipping from 14 to 12. However, the outlook for the next 12 months improved, rising from 16 to 17.

According to NAB Chief Economist Alan Oster, "Consistent with our monthly business survey, today's release shows business conditions remained resilient at above-average levels through the start of the year. Confidence remained weak but showed some improvement relative to the tail end of 2023."

The report also highlighted easing cost pressures, although the reduction was minimal. Labor costs grew at a slightly reduced rate of 1.2%, down from 1.3% in the previous quarter, and purchase costs increased by 1.1%, down from 1.2%. Meanwhile, final product price growth remained steady at 0.7%, and retail price growth decreased marginally to 0.8% from 0.9%.

Oster noted, "There continue to be some positive signs of easing cost pressures for businesses but progress was more incremental through Q1. Importantly, forward-looking indicators of firms' expectations for price growth suggest firms expect some further moderation."

Full Australia NAB Quarterly Business Confidence release here.

Australia's employment figures for March revealed a slight contraction of -6.6k, worse than expectation of 7.2k growth. This downturn was primarily due to drop in part-time employment by -34.5k, partially offset by rise in full-time by 27.9k.

Unemployment rate rose from 3.7% to 3.8%, below expectation of 3.9%. Participation rate fell from 66.7% to 66.6%. Monthly hours worked rose 0.9% mom.

Bjorn Jarvis, Head of Labour Statistics at ABS, noted, "The labour market remained relatively tight in March, with an employment-to-population ratio and participation rate still close to their record highs in November 2023." He pointed out that although there has been a modest decline of 0.4 percentage points since the highs of last November, the metrics remain substantially above pre-pandemic levels.

Full Australia employment release here.

Fed Governor Michelle Bowman, speaking at an International Institute of Finance conference, remarked that progress on inflation has "slowed" and may have "even stalled at this point".

Bowman elaborated that the existing levels of growth and market activity might indicate that the current policy stance may not be restrictive enough. "There is a lot of financial market activity and a lot of continued growth that we wouldn't have expected if policy was sufficiently tight," she commented, adding, "I think it is restrictive. I think time will tell whether it is sufficiently restrictive."

Separately, Cleveland Fed President Loretta Mester also echoed the need for caution before making further policy adjustments. While she remains hopeful that inflation will decrease, Mester emphasized the importance of further data analysis before proceeding with any monetary policy changes. "I still am expecting inflation to come down but I do think that we need to be watching and gathering more information before we take an action," Mester commented.

ECB officials have indicated a growing likelihood of a rate cut as soon as June, though decisions hinge on forthcoming economic projections and persistent inflation concerns.

Bundesbank President and ECB Governing Council member Joachim Nagel voiced cautious optimism to CNBC about the possibility of easing monetary policy, noting, "the probability is increasing" for a rate reduction, albeit with "some caveats" due to still-high core and service inflation rates.

Nagel emphasized that ECB's upcoming projections in June will be crucial. "For the June meeting, we will get our projections, so we will get our new forecasts and if there is a confirmation that inflation is really going down and we will achieve our target in 2025," he explained.

In tandem, Mario Centeno, Governor of the Bank of Portugal and fellow ECB Governing Council member, described a rate cut in June as "very likely," asserting that even with a reduction of 25 or 50 basis the ECB's monetary policy would remain tight.

Slovenia's central bank governor Bostjan Vasle projected that interest rates should be "much closer to 3% towards the end of the year if everything goes according to plan." However, he also expressed concern over recent geopolitical tensions in the Middle East.

BoE Governor Andrew Bailey, speaking at an International Institute of Finance conference, projected a "quite a strong drop" in next month's inflation figures. This expectation is largely due to the unique household energy pricing system in the UK, which is set to impact the overall inflation calculations differently compared to other sectors.

However, he was quick to temper this optimistic forecast with a note of caution regarding the broader inflationary landscape. According to Bailey, underlying components of the inflation measure continue to show disparities that could complicate monetary policy response.

The Governor pointed out that while energy price inflation is currently running at minus 20%, the inflation in services remains high, around 6%. This stark contrast in inflation rates across different sectors presents an "unbalanced" picture.

"We don't have to have every component actually at target, but you do have to have a better balance," Bailey remarked.

• WTI reversed from resistance zone
• Likely to fall to support level 80.00

WTI crude oil recently reversed down from the resistance zone lying between the resistance level 86.00, upper daily Bollinger Band and the resistance trendline of the daily up channel from December.

The downward reversal from this resistance zone started the active minor ABC correction 2.

WTI crude oil can be expected to fall further to the next round support level 80.00 (former low of wave (4) from March).

• EURGBP reversed from strong support zone
• Likely to rise to resistance level 0.8585

EURGBP currency pair recently reversed up from the strong support zone surrounding the powerful support level 0.8515, which has been reversing the price from last June.

This support zone was further strengthened by the lower daily Bollinger Band.

Given the strength of the support level 0.8515 and the bearish sterling sentiment, EURGBP can be expected to rise further to the next resistance level 0.8585 (which has been reversing the price from January).

Part I: A Framework to Characterize Episodes of Stagflation

Summary

• In this first report of a three-part series, we present a framework to characterize historical episodes of stagflation into mild, moderate or severe episodes.
• Iain Macleod coined the term "stagflation" during an address to the House of Commons in 1965: “We now have the worst of both worlds—not just inflation on the one side or stagnation on the other, but both of them together.”
• Stagflation can impose significant stress on the economy and can be a difficult situation to escape. Elevated inflation erodes consumer purchasing power, while weaker demand leads to a deterioration in the labor market, thereby limiting the opportunity for real wage gains.
• Conventional monetary or fiscal policy actions are remedies that often improve stagnation or inflation, but not both.
• The most salient episode of stagflation in modern U.S. history occurred in the 1970s. A perfect storm of energy price shocks, robust labor cost growth and elevated government spending led inflation to spiral, while economic output faltered and unemployment rose.
• While we could debate on the fairness of that comparison, the exercise of comparing bouts of stagflation led us to develop a simple framework to organize historical episodes on a severity scale.
• In data that span 1950 to present, we identified 13 instances of stagflation. Five episodes are mild, four are moderate and four are severe. The shortest episodes lasted two quarters, occurring in 1977-1978 and 1995, and the longest episode occurred in 1979-1982 (16 quarters).
• In the next installment of this series, we summarize past episodes of stagflation and their accompanying monetary policy decisions.

A Stagflation Situation

The door to stagflation has opened. Consumer price inflation ripped to a 40-year high in 2022 while real GDP growth was negative through the first half of that year. Persistent price growth amid contracting output can spell trouble for the stability of the economy. While inflation has cooled (Figure 1) and output has ramped up since then, the risk of stagflation in the coming year or so remains elevated. In this first report of a three-part series, we present a framework to characterize historical episodes of stagflation into mild, moderate or severe episodes.

To the best of our knowledge, Iain Macleod coined the term during an address to the House of Commons in 1965. He said, “We now have the worst of both worlds—not just inflation on the one side or stagnation on the other, but both of them together. We have a sort of ‘stagflation’ situation. And history, in modern terms, is indeed being made.”

Macleod believed history was being made because the economic literature at the time doubted the existence of stagflation. Stagnation and inflation often move in opposite directions. The Phillips Curve is predicated on a similar principle. That is, a rising unemployment rate, which typically correlates with falling output, will bring down inflation; a falling unemployment rate, which typically correlates with rising output, will push inflation higher. The occurrence of stagflation ran in opposition to the logic behind the Phillips Curve, as elevated price growth persisted amid rising unemployment and weak economic growth.

Stagflation can impose significant stress on the economy and can be a difficult situation to escape. Elevated inflation erodes consumer purchasing power, while weaker demand leads to a deterioration in the labor market, thereby limiting the opportunity for real wage gains. Conventional monetary or fiscal policy actions are remedies that often improve stagnation or inflation, but not both. For example, enacting an expansionary policy, such as a fiscal stimulus package for consumers, can promote economic activity during a downturn, but it can also cause inflation to rise, all else equal. On the flip side, enacting a contractionary policy, such as raising short-term interest rates, can help to rein in inflation, but higher rates also dampen economic growth prospects.

The most salient episode of stagflation in modern U.S. history occurred in the 1970s. A perfect storm of energy price shocks, robust labor cost growth and elevated government spending led inflation to spiral while economic output faltered and unemployment rose (Figure 2). At the time, the appropriate monetary policy path was not readily apparent and the Federal Reserve, led by Chair Arthur Burns, lowered the target for the federal funds rate in the mid-1970s to support employment growth. Yet expansionary policy during a stagflationary episode turned out to be a policy mistake. While the unemployment rate descended over the back half of the 1970s, consumer prices continued to increase at a rapid clip as elevated petroleum prices and wage costs were passed on to households via higher selling prices. Price stability was eventually restored in the 1980s after a few tough years of restrictive monetary policy enacted under Chair Paul Volcker.

Analysts have pointed to the 1970s as a similar experience to the post-pandemic inflation surge. While we could debate on the fairness of that comparison, the exercise of comparing bouts of stagflation led us to develop a simple framework to organize historical episodes on a severity scale.

Laying the Foundation

We define a stagflation episode as a period of at least two consecutive quarters with elevated inflation and low output growth. We use the year-over-year percent change of the CPI as our measure of inflation, and the compound annual growth rate of real GDP as our measure of output growth. We readily acknowledge that the FOMC’s current preferred measure of inflation is the PCE deflator.1 However, the FOMC formerly used the CPI as its primary inflation gauge and forecasted the CPI in the Greenbook until 2000. (The Greenbook forecasts switched to the PCE deflator in 2001). Still today, the FOMC pays close attention to the CPI, as it is timelier than the PCE deflator.

Figure 3 shows average real GDP and CPI growth for each business cycle expansion since 1950 and their standard deviations. The greatest average real GDP growth of 7.75% followed the 1948-1949 recession, while the smallest average growth of 2.31% reflects the post-Great Recession era. If we used 7.8% as a benchmark for real GDP growth throughout our entire sample, then most of the GDP series would be below average. By the same token, using 2.3% as the benchmark for output growth would render most periods as above average. Consequently, we employ the prior cycle’s average of real GDP growth as a benchmark to determine periods of “low” output growth.

If real GDP growth comes in below the prior cycle’s average for at least two consecutive quarters, we assign that period with low output growth. For example, real GDP growth averaged 2.9% between Q1-2002 and Q3-2007. In the expansionary phase following the Great Recession in 2007-2009, the U.S. economy expanded at rates below 2.9% from Q4-2010 through Q3-2011, so we designate this period with low output growth.

On the inflation side, our benchmarks are more fluid. The evolving nature of the U.S. economy has made one period’s high inflation feel too high of a bar to clear for other periods. For instance, the CPI averaged 7% annual growth throughout the 1970s, compared to its 1990s average of 3%. Several structural changes took place between these two decades, such as a transition away from price indexation in wage contracts and less reliance on petroleum imports. Thus, we employ a time-varying benchmark for inflation and summarize them in Figure 4.

We find that the 2% target is a reasonable benchmark for the 1990s onwards, as inflation trended around that rate and monetary policy decisions were guided by that target. Indeed, the FOMC started to explicitly publish its 2% inflation target in post-meeting statements in the early 1990s. Prior to 1990, the inflation picture was mixed. Inflation was elevated and volatile during the 1970s and 1980s (revisit Figure 3). To parse through the variation, we use the CPI’s average growth over the expansionary phase of the 1960s (2.36%) as the watermark for “normal inflation” from 1975 to 1991. Prior to 1975, we return to using the prior cycle’s average CPI growth as the benchmark.

Drawing Lines in the Sand

We utilize the magnitude and duration of high inflation, alongside low output growth, to characterize stagflation into different categories. If a period is determined to have low output growth relative to the prior cycle, we then evaluate the inflationary pulse of that period to determine if stagflation occurred. Should inflation be elevated relative to the criteria outlined in Figure 4, we then categorize the episode of stagflation as mild, moderate or severe.

Given real GDP growth is below the prior cycle’s average for at least two straight quarters, we define a “mild” episode of stagflation as two consecutive quarters where the CPI inflation rate is above the inflation benchmark by one standard deviation. A “moderate” episode is three or four consecutive quarters where CPI inflation is above the benchmark by one to three standard deviations. Finally, a “severe” episode is at least six consecutive quarters where the CPI inflation rate is above the benchmark by three standard deviations or more.

In data that span from 1950 to present, we identified 13 instances of stagflation and outline them in Figure 5. Five episodes are mild, four are moderate and four are severe. The shortest episodes lasted two quarters, occurring in 1977-1978 and 1995, and the longest episode occurred in 1979-1982 (16 quarters). Furthermore, four stagflation episodes did not overlap with recessions, while nine episodes occurred during or near a recession.

The most recent occurrence of stagflation began in the second quarter of 2021, when consumer prices gathered momentum amid gummed up supply chains and ramped up household demand. The drivers of inflation have shifted as we have gotten further away from the pandemic, but price growth remains persistent, especially relative to the past business cycle. At the same time, output growth has strengthened, which suggests the severity of the latest bout of stagflation has eased or the episode has ended altogether.

What will U.S. central bankers decide in the face of these crosscurrents? Can we learn from historical episodes of stagflation? In the next installment of this series, we summarize past episodes and their accompanying monetary policy decisions. In the final installment, we revisit the 2021 episode and consider the risks of stagflation in the coming years.2

Endnotes

1 – See a recent special report published in April 2024 for more detail on the differences between the Consumer Price Index and the PCE Deflator.

2 – This series is based on a 2024 American Economic Association Annual Meeting paper by Azhar Iqbal and Nicole Cervi titled "Characterizing Stagflation into Mild, Moderate and Severe Episodes: A New Approach". Please contact the authors if interested in the full paper.