Vaccination mandates appear to be working, young children can be approved for injections by Halloween, and the coronavirus appears to be on the decline. But these signs of hope heralding another messy phase for the country’s economic recovery – and that puts Wall Street on more edge than it has been in months.

The Federal Reserve has said it will start cutting programs that have helped support markets over the past 18 months, as the frantic pace of economic growth appears to be slowing, a fact underscored by the disappointing jobs report from last week.

And price increases resulting from pandemic-related closures and supply chain disruptions have been stubbornly persistent. A key measure of inflation, the Consumer Price Index, will be updated on Wednesday morning – and investors will be watching closely.

“There’s a lot for the market to digest at any given time and a lot of unknowns, frankly, that investors are grappling with,” said Matt Fruhan, who manages the large-cap equity fund closely. $ 3 billion, as well as other funds, for loyalty.

That uncertainty halted the momentum that propelled stocks to a series of record highs over the summer. Last month, the S&P 500 suffered its biggest drop – 4.8% – since the start of the pandemic. Investors gained ground in October, pushing shares up 1%.

By any objective measure, it has been a good year for stocks, with the S&P 500 up nearly 16% through the end of Tuesday’s trading. But the bumpiness reflects growing uncertainty about the next chapter in the recovery-induced rally, with stock prices swinging more from day to day – and even hour to hour – than they have since. months.

The U.S. labor market update on Friday almost perfectly summed up the confusing economic backdrop facing investors: The number of new jobs is well below expectations, but wage growth has exploded.

“The growth rate is moderating, but the inflation rate is increasing,” said Paul Meggyesi, currency analyst at JPMorgan in London. “It’s an unusual decoupling.

Many look to history to try and make sense of it, which is why Wall Street gossips about the chances of a return of a 1970s economic specter: the toxic mix of sluggish economic growth and high inflation. which became known as stagflation.

The comparison is not perfect. At the time, inflation was in double digits and unemployment was almost 9%. Neither inflation nor unemployment is close to this level now.

But on Wall Street, the level of attention to stagflation is skyrocketing. Last week, the volume of articles mentioning the term “stagflation” published by financial reporting service Bloomberg hit a record high, the company reported.

Mr Meggyesi, who called the current situation “lean stagflation” in a recent note to clients, is part of this wave of analysts who are reconsidering the idea, as well as the risks it could present to the markets.

The most obvious echo is the surprising and lasting rise in prices. As the costs of things like lumber, microchips and steel rose this spring, Federal Reserve officials were careful to say the hike would be “transient.” Once businesses returned to normal, officials said, production would increase, supply lines and inventories would be replenished and prices would drop.

But after a new round of economic disruption caused by the Delta variant of the coronavirus – many of which in major Asian manufacturing centers such as Vietnam – there are few signs that the upward pressure on prices will soon go away.

A report released this month showed that the Fed’s preferred inflation indicator rose at the fastest rate in 30 years in August, and this week, a measure of used car wholesale prices – a increasingly important factor in the calculation of inflation – reached an all-time high.

The rise in prices worries investors for several reasons. On the one hand, rising costs can reduce corporate profits, a key factor in stock prices. Traders are also worried that if inflation rises too quickly, the Fed could raise interest rates to try to control it. At times in the past, Fed rate hikes have brought the market down. Higher rates make owning stocks less attractive compared to holding bonds, leading some investors to get rid of stocks.

“I think the reason we’ve become more volatile is that the market is starting to heat up with the belief that inflation is not as transient as the Federal Reserve chief keeps telling us,” said John Bailer, portfolio manager at Newton. Investment Management, where he oversees mutual funds with over $ 4 billion in client assets.

On the contrary, the upward pressure on prices seems to be increasing.

In another echo of the 1970s – when the stagflation dynamic was sparked by the 1973 Arab oil embargo – Russia has resisted increased shipments of natural gas to Europe in recent months despite growing demand. This sent prices skyrocketing, halting some industrial activity and producing painful energy bills in mainland Europe and Britain.

Oil prices have reached their highest level in seven years in recent weeks, after the powerful Organization of the Petroleum Exporting Countries decided to increase production only gradually. In Britain – where the term ‘stagflation’ is commonly thought to originate – a fuel shortage last month resulting from a shortage of truck drivers caused panic shopping and long queues in gas stations, another eerie echo of the messy 1970s.

“Historically, stagflation has often been accompanied by oil shocks,” said Jill Carey Hall, stock analyst at BofA Securities. “There is certainly a growing concern that we might be in this type of environment.”

The effects of rising oil prices have been less severe in the United States, but prices are also on the rise for a variety of important commodities. The S&P GSCI Commodities Index, which tracks 24 traded commodities – such as aluminum, copper and soybeans – has hit its highest level since late 2014 in recent days. This suggests that inflationary pressures will tighten for some time.

The comparison between today and the 1970s seems to break with the “stag” component of stagflation. By almost any measure, economic growth is expected to be remarkably strong this year.

Analysts polled by Bloomberg predict that gross domestic product will rise 5.9% this year – a figure that would be the highest score since 1984.

But growth forecasts have been revised downwards. Goldman Sachs analysts cut their 2021 growth forecast for the United States to 5.6% on Sunday. It had reached 7.2% in March.

And on Tuesday, the International Monetary Fund lowered its global growth forecast for 2021 to 5.9%, from 6% forecast in July, while warning of the risks of supply chain disruptions fueling inflation. Its forecast for the United States has been reduced to 6%, from 7% of projected growth three months ago.

Despite this, Kristalina Georgieva, the managing director of the IMF, rejected any discussion of stagflation in an interview on Tuesday. Ms Georgieva said the world was experiencing a “stop and go” recovery, and that while the United States was losing some of its considerable momentum, other regions – including Europe – were gaining it.

“We don’t see the global economy stagnating,” she said. “We see that it is not moving in synchronization across the world.”

Steven Ricchiuto, chief US economist at Mizuho Securities USA, said the skyrocketing growth in the first half of the year would never be sustainable. “Expectations no longer match reality,” he said.

But any sense of disappointment – despite objectively good numbers – could weigh on the market in the coming weeks, as large companies begin to release their financial results for the third quarter.

GDP growth is one of the main drivers of income for large companies. A slightly weaker economy could mean lower than expected sales figures, just as inflationary pressures mean higher costs.

This has once been an ugly combination for the corporate profits of some companies. The stock prices of several notable companies – FedEx, Nike, CarMax and Bed Bath & Beyond among them – have been beaten in recent weeks after the release of disappointing quarterly reports.

Shares of Lamb Weston, an Idaho-based maker of frozen potato products, fell after falling short of earnings expectations as everything from potatoes to cooking oils to packaging, is more expensive. The company’s shares have fallen nearly 12% since it released its earnings and revised its outlook last week, saying earnings would remain under pressure for the remainder of the year.

“We had previously assumed that these costs would start to gradually decrease,” Bernadette Madarieta, chief financial officer of the company, told analysts.

Other stocks could suffer a similar fate.

“People are going to be even more disappointed,” said Mike Wilson, chief US equity strategist at Morgan Stanley. “Even if the economy is doing well, this may not translate into the types of income people expect.”

Alan Report contributed reports.