Stagflation is 'the big bogeyman out there' — and many increasingly fear its return

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 shortage of supply, after OPEC+ cut production targets, under the leadership of Saudi Arabia and Russia. This must be seen in the context of a moving geopolitical environment, with Saudi Arabia recently joining the BRICS group," they added.

The BRICS economic coalition of emerging markets last month invited six countries to become members.

The alliance — which is currently composed of Brazil, Russia, India, China and South Africa — asked Argentina, Egypt, Iran, Ethiopia, Saudi Arabia and the United Arab Emirates to become new members of the bloc, with membership to take effect from Jan. 1, 2024.

Paul Gambles, co-founder and managing partner at MBMG Family Office Group, said Friday that rising oil prices could keep inflation higher for longer. He also suggested that policymakers appeared determined to bring the risk of stagflation back into the picture.

"The oil price is still really a wild card. And what we are seeing now is we can get into a situation where we do end up with softer demand for oil and yet the prices can still keep going higher because of the fact that there is this ability to constrain supply," Gambles told CNBC's "Squawk Box Europe."

He cited Germany, Europe's traditional growth engine, as one notable example where the mix of high inflation and low growth seems to have taken hold.

"Germany looks like it is on the precipice of a really significant slowdown combined with a potential inflation spike because of energy prices," Gambles said.

"If you look at the premiums that are being charged on U.S. oil that is being shipped to Europe right now because of the low inventories in the states then it suggests that policymakers — aided by OPEC and the other oil suppliers — are doing everything they can to create the potential for stagflation. And that's a real worry."