The specter of stagflation

Friday Finance

August 14th saw the yield on a 10 year US Treasury bond briefly dip below that offered on a 2 year US Treasury note. Everybody, their mothers, and their dogs began writing about yield curve inversion, as if it had come upon us suddenly. They mentioned its status as a harbinger of recession, they offered explanations of what it is, and they recommended what could be done about it, among other things.

Charting the yield curves as of August for the last three years, courtesy of GuruFocus.

But the yield curve has been inverted for a little while now. Further, what seemed to be lost in all the hubbub are the inflation numbers that came out this past Tuesday. It turns out that inflation in the United States rose, with overall and core annual inflation numbers as of July exceeding market expectations in both cases.

Charting the core annual inflation rate, courtesy of Trading Economics.

What’s more, the Fed recently cut rates by a quarter of a point, exactly two weeks before the 10Y and 2Y yields danced past each other. The ripples of a cut aren’t felt in the economy for a little while, so we won’t be able to discern the full impact of that July 31st cut anytime too soon. However, if we already had an uptick in inflation preceding the latest cut, and the yield curve stays inverted, and we do head towards (or into) a…