With inflation rising and GDP forecasts continuing to be revised downward, fears of stagflation have crept back into the economy, with the economy hovering in a dangerous position between two possible outcomes: recovery or crash.
Stagflation is a sort of market purgatory, while we wait for one of two possibilities. Either the economy will recover and we’ll have inflation, or the economy will continue to stagnate, and we’ll end up with deflation.
While we will eventually work our way out of stagflation, inflation is hard to maintain if the global economy goes into a slowdown or decline. When the economy does begin to recover, it will bring inflation.
With QE2, Fed Chairman Bernanke has opened Pandora’s box, and once you open the box, it’s hard to control. When the banks start lending again, it will unleash the reserves that the Fed has pumped into the economy and there will be big inflation.