Surging oil prices fuel fears of dreaded phenomenon

Just a few months ago, investors appeared relatively sanguine about the dreaded prospect of stagnant economic activity and rising inflation.

Oil prices surging to the brink of $100 per barrel and the specter of higher-for-longer inflation have renewed concern about stagflation risks, however.

“I think that the big bogeyman out there is stagflation, that we get into this spirit of high inflation and low growth,” Mel Lagomasino, CEO of WE Family Offices, told CNBC’s “Squawk Box” on Wednesday.

Lagomasino cited comments from Minneapolis Fed President Neel Kashkari, who said in an essay earlier this week that U.S. interest rates may have to go “meaningfully higher” to bring down stubbornly sticky inflation.

Kashkari reaffirmed this message when speaking to CNBC on Wednesday, saying that he was not sure if interest rates have been raised enough to successfully fight price growth.

“It looks like they might not just be higher for longer, they might be quite a bit higher for longer,” Lagomasino said, before adding that she believes a recession is “definitely” on the horizon.

Stagflation was first recognized in the 1970s, when an oil shock prompted an extended period of higher prices but sharply falling economic growth.

The phenomenon is characterized by slow growth, high unemployment and soaring inflation. The one ingredient currently missing is the high unemployment, still relatively low at 3.8% — although there are fears that mounting layoffs may mean this could soon change.

Market participants are worried that surging oil prices could keep inflation higher for longer, amplifying the risk of stagflation.

Brent crude futures have jumped more than $20 a barrel in the three months to late September, a rally that has put a return to $100 sharply into focus. The international benchmark was last seen trading at $96.12 on Friday, up 0.8% for the session. U.S. West Texas Intermediate futures, meanwhile, rose 1.4% to trade at $92.96.

The price rally comes amid growing expectations of tighter supply, after Saudi Arabia, leader of OPEC, and non-OPEC heavyweight Russia moved to draw down global inventories and extend some of their voluntary oil supply cuts through to the end of the year. Together, OPEC and non-OPEC producers are known as OPEC+.

“By early summer, investors looked increasingly confident that the global economy was escaping the plague of stagflation,” analysts at Generali Investments said in a research note published Thursday.

“They are having a second thought – rightly so.”

Looking ahead to the fourth quarter, analysts at Generali Investments said the oil price surge was “most unwelcome” because this would likely keep headline U.S. inflation higher and hurt economic growth.

“The price pressure reflects a…