Stagflation is back, ready or not
Commentary: U.S. revisiting economic woesWASHINGTON, N.Y. (MarketWatch) — The dreaded combination of stagnation and inflation has returned, bringing with it new challenges for policy makers, investors, business people and consumers.
| date | report | forecast | previous |
|---|---|---|---|
| Aug. 14 | Retail sales | 0.2% | -0.5% |
| Aug. 14 | Retail sales ex-autos | 0.4% | -0.4% |
| Aug. 14 | Producer price index | 0.2% | 0.1% |
| Aug. 14 | Core PPI | 0.2% | 0.2% |
| Aug. 15 | Consumer price index | 0.2% | 0.0% |
| Aug. 15 | Core CPI | 0.2% | 0.2% |
| Aug. 15 | Empire state index | 6.0 | 7.4 |
| Aug. 15 | Industrial production | 0.4% | 0.4% |
| Aug. 16 | Weekly jobless claims | 370,000 | 361,000 |
| Aug. 16 | Housing starts | 760,000 | 760,000 |
| Aug. 16 | Philly Fed | -8.0 | -12.9 |
| Aug. 17 | UMich consumer sentiment | 73.0 | 72.3 |
| Aug. 17 | Leading indicators | 0.0% | -0.3% |
But it is a real challenge to deal with both at the same time, which is
what policy makers must do when confronted with stagflation. This is
because fighting one problem risks exacerbating the other.
While neither unemployment nor inflation is uncommon, every so often,
both rise together to alarmingly high levels. Take the period from 1973
through 1975, for example.
The economy entered into a recession in November 1973 and did not stop
falling until March 1975 — a period of 16 months, which at that time was
the longest downturn since the 1930s.
Meanwhile, inflation, which had risen from 3.6% at the beginning of
1973, to 8.3% when the recession began, continued to rise throughout
1974, peaking at an annual rate of 12.3% in December of that year.
This double-digit inflation was caused by rapid money growth in the wake of the quadrupling of oil prices
in late 1973, which led to a sharp rise in inflation expectations,
especially through cost-of-living-clauses in private and public
contracts.
However, the combination of sharply rising prices and interest rates
depleted buying power, causing business to cut back. Layoffs rose,
sending the unemployment rate from 4.9% in the fourth quarter of 1973 to
a high of 8.7% by the second quarter of 1975.
President Ford’s WIN (Whip Inflation Now) policy was futile; so were President Carter’s wage-price guidelines.
Banks hit the gas on car loans
Banks and investors, still wary about
It took Paul Volcker to vanquish inflation. The Fed chief’s policy of
tight money and record-high interest rates produced a double-dip
recession from 1980-82 — but sent inflation tumbling from an annual rate
of 15% in early 1980 to only 2.5% by the middle of 1983.
On the surface, today’s economy looks like just a case of stagnation.
After all, it’s the unemployment rate that’s high at 8.3%; the reported
rate of inflation has been below 2% for the past few months.
But here is the rub: While some prices, such as fuel, are up noticeably,
today’s inflation seems to be very low, probably a result of giving
less for the same price.
For example, in the supermarket, you now find 10 mini-bagels for the price of 12, and 21 garbage bags for the price of 25.
Summer camps are now giving your children seven weeks away for the price
of eight. And how many of you have noticed new menus at your favorite
restaurant with new (higher) prices?
Now the government’s surveyors are supposed to pick this up, but they
are usually late to the party until it’s called to their attention, as
we are doing here.
More (visible) inflation lies ahead. The drought has already sent grain
prices soaring. Cattle will soon follow. Besides food, prices are
already rising across the board for such staples as cars, clothing, and
shelter — and, of course, medical care.
If the Fed eases further, reported inflation is bound to rise. If fiscal
policy tightens, the economy will probably slide back into recession.
Since both seem likely to happen, you might as well add stagflation to your list of concerns.
No comments:
Post a Comment