Economics journalist have been bandying about the S-word for quite some time, but usually in a speculative, "could it happen again?" sort of way. Now the Wall Street Journal's Afternoon Report suggests, yeah, it could, and it is.
Inflation and sluggish growth haven't joined in that ugly brew called stagflation since the 1970s. They may not be ready for a reunion, but they are making simultaneous threats to the economy and battling one might only encourage the other.
Among a batch of economic readings today, the Labor Department reported that import prices jumped 1.7% last month. The data included troubling signs that consumer products, many imported from China, have caught the inflation bug. The signs pointing to slowing growth included a sharp deterioration in consumers' mood, as measured by the Reuters/University of Michigan Surveys of Consumers, and a worsening outlook for manufacturers, revealed in the Federal Reserve Bank of New York's Empire State Manufacturing survey for February. The government also reported that U.S. industrial production only increased slightly during January, as colder weather elevated utilities output and offset sharp declines in the auto and housing sectors. If indeed inflation is teaming up with slower growth, it means big headaches for policy makers, in particular Ben Bernanke. The Federal Reserve chief in congressional testimony yesterday suggested that he is willing to keep lowering interest-rates if the economy stalls. But, naturally, he will have less room to do so if those lower rates would accelerate inflation to unacceptable levels.
There's long been a pretty compelling argument that the stagflation of the 1970's was basically a productivity shock from the two oil crises. But until now, it's been kind of hard to test. Seeing creeping stagflation paired with oil prices in the 1990s would tend to bolster that theory.
Is spencer (ackerman?) going to post again and trot out his lie about how real interest rates are high right now?
How do I make money off this?
oil prices in the 1990s
Huh?
I wish someone would study the correlation between the decline in inflation and the outsourcing of manufacturing and service jobs to low wage countries.
The reason being, that in a world where resources are limited, we essentially were able to off-set the demand for resources by bringing down the cost of value-added activities.
The one problem with this is that it is a short-term fix. Once the developing nations start to grow, they:
(a) demand for even more natural resources themselves, increasing the price for those;
(b) Their wages slowly rise, making it harder and harder for cost containment for the West.
It was a great ride for educated peoples in the West, since we were immune (up until recently) to pressures from outsourcing, but benefited from the reduced prices for goods (or at least stable prices for goods).
However, we have played out this game, and now we have to deal with the downside. As these nations in the 3rd World have developed, and increase their skills along the value chain, more and more poeple in the West are seeing their earnings decline or not rise, at the same time that demand world-wide for goods is increasing, raising prices.
It is a double-whammy to America and the American way of life.
Brad, sorry, but I gotta throw the BS flag.
5 yard penalty, minor misuse of historical earnings trends.
Despite the fantasies of the left and other chronically unhappy folks, real wages (measured as money + benefits) have been rising steadily here in the USA.
I'm not too worried about stagflation or oil shocks. The Fed's got to keep cutting to get us past the credit crunch mess, but as long as they raise rates as fast as they cut them, they can reign-in inflation once growth picks up again. They could conceivably be raising rates again by the end of this year.
As far as oil prices, oil has a smaller effect on our more-efficient economy today than it did in the '70's, and our extraction capabilities are greater. The sustained high oil prices are finally encouraging oil companies to invest in more production (which will increase supply), and in the meantime, consumers will be buying more fuel-efficient cars, industry will become more fuel-efficient (e.g., transporting more by rail versus trucks), which will moderate demand.
"How do I make money off this?"
Buy stock in companies that produce commodities you think will go up in price (e.g., oil, food). I've done well so far with BPT, a royalty trust that pays out in dividends 100% of its royalties from oil produced in Alaska's Prudhoe Bay field. Dividends of course depend on oil prices, as well as production in the field, but there is no geopolitical risk, since this is U.S.-owned.
One caution: I am bullish on oil for the next year or two, but eventually, oil prices are going to come down, I think. There have been a couple of enormous discoveries in the last couple of years (e.g., the one in the Gulf of Mexico; Brazil's Tupi field), that will take years to develop, but once they are online, supplies will go up. So don't buy a stock like BPT with the idea of holding it and forgetting about it.
If you exclude oil and food prices, the inflation threat is severely overblown. And oil and food prices are clearly going up because of forces other than economic weaknesses that underlie typical inflation.
So, no stagflation for us, despite how neatly that would fit the media narrative about our "terrible" economy. Sorry.
Two things the feds could do to cool off food and fuel prices:
1) Drop the 54 cent per gallon tariff on Brazilian sugar cane-based ethanol.
2) Stop subsidizing domestic corn-based ethanol. If need be, pay the subsidy to domestic producers to not make the stuff, and let all of the corn supply be used for food.
Fred, I'm with you all the way on those, but I really doubt they are politically feasible.
If we are ever going to do anything sensible with our FUBARed (or is that FedUBAR) agricultural or energy poicies it won't be during an election year. (Probably not a non-election year either, hence "beyond all repair")
One should realize that one of the reason that oil and food price increases have not had the broad effect that people have been looking for is that much of the burden is being borne by individuals. Over 2/3s of our petroleum is used in transportation, where the commercial users pass through the cost and the individuals simply bear the cost directly. After the oil shocks most non-transportation commercial users got off oil and shifted to other fuels.
The stagflation will probably come because food prices and oil prices will continue to rise. Meanwhile individuals will no longer have the access to the $ 800 billion or more that had been annually drawn out of home equity. Since there is little to supplant this consumer spending support, overall economic activity will most likely go down,leaving more people unemployed. Thus we will have a stagnant economy with external inflation drivers. This will not be a good thing and is likely to last for some time.
One other thing that people should also be following are foreign remittances, particularly to Mexico. Much of the labor impacts of the decline in housing production have been felt first by illegals who worked at the job sites. Their pain should be reflected in lower remittances. In the coming year the suppliers will start to lay off and decline substantially.
Obligatory post from me reminding everyone that:
1) The word "inflation" was redefined early in the 20th century to mean "a rise in prices" rather than "an increase in the money supply".
2) In light of the original definition in (1) inflation can be occurring while prices are relatively steady, as a result of productivity increases exerting downward price pressure.
3) True inflation in modern economies, in particular large changes in same, always and only originates from central bank action. "It's the printing presses, stupid!"
4) Inflation does not magically cause economic activity. Realizing this it is easy to see how opening the money spigots during a downturn can result in a confluence of events that we call "stagflation".