Putting Stagflation Claims in Actual Context

Is stagflation setting in? That question seems to be on many minds, at least per the coverage of Thursday’s US economic data releases, which showed weekly jobless claims hitting their highest level since 2021 and the Consumer Price Index (CPI) inflation rate accelerating to 2.9% y/y in August from 2.7% in July.^[i] The implication: With prices heating up and businesses cutting back, the US economy is entering a maddening stretch where growth can’t help households overcome the pain of fast-rising prices. But this looks rather hasty once you dive past surface narratives. The US economy isn’t headwind-free, but stagflation chatter looks like a false fear—a brick in this bull market’s wall of worry.

For a general claim to be true, it has to hold up when you look at the data in context. Now, where jobless claims are concerned, noting that 263,000 new claims last week is the highest since October 2021 might seem like context.^[ii] The vision it creates—that people are getting laid off at the same rate they were during the pandemic—might seem to support the case for things turning bad now. But there are a couple problems with this approach. One, “highest since” or “worst since” type claims don’t really tell you anything, since the comparison point is inherently arbitrary. Two, October 2021 is at the tail end of a post-lockdown job market recovery, a return to general job market stability. Heck, we recall everyone saying things were rocking and rolling then, as a hot jobs market was enabling a “great resignation” where people were free to quit the daily grind, relocate to their dream ZIP code and instantly find a better job at higher pay. That always seemed far-fetched to us, but it is odd now that those consuming economic news are implicitly encouraged to see this as a bad comparison point when cheer reigned in labor markets then.

We think a better way to get context is to look at a reading in light of the series’ entire history to determine whether it is indeed so bad. The weekly initial jobless claims dataset begins in January 1967. So we downloaded the whole series, did some quick math and determined the monthly average is 361,687.^[iii] That is almost 100,000 higher than this allegedly troublesome result for last week. So worry over this seems like recency bias. People anchor to the lower layoffs before the present, so any uptick looks bad. But that is a behavioral error—not a sign things are turning awful now.

Mind you, we aren’t dismissing the pain and hardship for those receiving pink slips. And with output and investment-oriented data hitting some speedbumps earlier this year, a lagging labor market hiccup isn’t a surprise. But also, we now know total nonfarm payrolls weakened this summer, even dipping in June. So an uptick in joblessness isn’t news to cold-hearted stocks.

The inflation readings look similarly benign in longer-term context. A lot of today’s angst focused on the month-over-month increase in core CPI, which excludes food and energy, of 0.3%.^[iv] Supposedly, this is evidence that tariffs are getting solidified in inflation data with more to come. We have seen plenty of tales of businesses passing reciprocal tariffs to consumers as they took effect last month. There is no denying that. But as we covered last month, rising prices in some goods isn’t the same thing as broad inflation, which spans the whole spectrum of goods and services. Tellingly, August’s month-over-month read is bang on the average since this dataset begins in 1957. Prices of some goods are always rising while others fall. The reasons always morph. Tariffs just happen to be in the dock now.

Another thing. Core CPI includes all goods and services bar energy and food. Most of it is services, which the shelter category dominates. And what was a primary contributor to August’s rise? You guessed it. Shelter. Part of that is rent and part is owner’s equivalent rent, which is the hypothetical amount a homeowner would pay to rent their own home. It is a made-up cost no one pays. And it is a lagging indicator of home prices, which are up on a long-running housing shortage that far predates tariffs. Granted, tariffs don’t make construction easier, given they distort supply and costs of necessary materials, but that isn’t why shelter costs rose in August. And that, too, is a long-running trend, not sneaking up on stocks.

So no, we don’t think jobless claims and CPI combine into stagflation. When put in proper context, we see two pretty benign readings that aren’t a surprise given extant economic conditions. And crucially, the surprise power for stocks appears slim to none. Conditions aren’t perfect, but stocks don’t need perfect. They just need reality to go a tad better than folks expect or, in this case, fear.

Which makes stagflation talk bullish. False fears lower expectations, raising the potential for big surprise power. This is why they are bricks in the wall of worry. Stocks climb on them. So let others fear stagflation while you keep your eye on the prize.