USA Stagflation Risk Dashboard 11 Aug 2025
The probabilties above were calculated via heuristic allocation of weights to the Indicaors below and transformed to probabilities [0,1] with a SoftMax function.
Introduction
The
U.S. economy is now in a state of flux and generally directionless due to the
uncertainty caused by the current Administration’s on-off trade and political
policies. However, many economists are of the opinion that a period of
stagflation lies ahead i.e. a period of inflationary conditions coexisting with
a period of recessionary conditions. There
are 3 possible scenarios of a Stagflation economic environment. as detailed
below. My US
Stagflation Risk Dashboard gives the probabilities for each scenario and is
updated each week based on the latest data available.
The 3 Possible
Scenarios of a stagflation economic environment.
1.
Adverse supply shock can cause both at once
- A negative
supply shock (oil/energy spike, geopolitical disruption, widespread
supply-chain stress, productivity slump) shifts the short‑run aggregate
supply curve left. That raises prices and lowers output at the same
time—classic stagflation—without any required sequence.
- Historical
example: 1973–75 and 1979–80 oil shocks produced higher inflation
alongside falling output.
2.
Recession can come first, followed by (or accompanied
by) inflation)
- A recession
driven by a financial crunch or external demand collapse can coincide
with currency depreciation and “imported” inflation (higher prices for
traded goods and energy). If fiscal deficits are monetized or
expectations de-anchor, inflation can rise even as output contracts.
- Examples
include several emerging‑market crises (e.g., parts of the Asian/LATAM
crises) where deep recessions coexisted with high inflation due to
devaluations and weak policy credibility.
3.
Inflation first but Central Bank’s raising of interest
rates tips economy into recession.
- Overheating and demand‑pull inflation can force central banks to tighten. If inflation proves sticky (e.g., due to supply constraints or wage‑price dynamics), the tightening can tip the economy into recession while inflation remains elevated—producing stagflation.
What it is: The 2s & 10s yield spread refers to the difference in yields between the 2-year and 10-year U.S. Treasury bonds. It is calculated by subtracting the yield of the 2-year bond from the yield of the 10-year bond.
What it is: A simple approximation of
expected inflation 5–10 years ahead using 2 × (10Y breakeven) − (5Y breakeven).
Why it matters: A measure of long-run
inflation credibility. If anchored near the low-to-mid 2s, markets generally
believe inflation returns to target over time. A persistent move much above
~2.5–2.7% would signal doubts about long-run inflation control.
#Note CPI will be included whenever it is
available.
Comment: Breakevens in mid 2s; 5y5y proxy anchored in mid 2s indicates long-run expectations are stable at the moment. Of course this may change in subsequent updates of this Dashboard.
TIPS Real Yields
Why it matters: Rising real yields is a
signal of an inflationary direction and
falling real yields is a signal of a
recessionary direction.
Comment: 10yr TIPS real yield easing; consistent with softer growth/less restrictive stance.
High Yield OAS
HY OAS (High Yield Option-Adjusted Spread)
What it is: The extra yield investors require to hold sub-investment grade (“junk”) corporate bonds over comparable Treasuries, adjusted for embedded options in the bonds.
Why it matters: It’s a pulse of market stress and default risk. Higher HY OAS = tighter financial conditions and rising recession/credit risk; lower HY OAS = easier conditions and risk appetite.
Comment: HY OAS at moderate level; credit functional, no acute distress signal at the moment.
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