Will the US face economic deterioration or rising inflation? Both simultaneously in stagflation? Or neither in a Goldilocks scenario? Empirical data offer few clues to resolve this question, whilst theoretical frameworks provide little directional guidance.
Taking GDP and CPI as proxies for economic quantity and price levels respectively, concurrent movements in both typically signal demand shocks, whereas divergent trends point to supply disturbances. Though direct demand-side metrics remain elusive — most available data capture supply conditions — prevailing sentiment and market psychology suggest demand has been stimulated to bubble-like proportions in recent years, vulnerable to an abrupt reversal.
