Why This Isn’t Stagflation

For some reason, the word stagflation keeps creeping back into the lexicon. It really shouldn’t be. As we have noted for quite some time, we are experiencing a form of "demi-stagflation."  Growth is below the long term trend, inflation is above.

Call it stagflation lite or blahflation,  but it is not the 10% inflation, 1% growth of the 1970s. So why are so many concerned about stagflation?

• GDP growth expected in Q1 07 to be < 2%
• CPI = 2.7%
• Spreads between 10y TIPS and non-inflation-indexed Treasuries widened
• Fed governor Miskin notes that if inflation does not moderate "we would have to do something about it"

Caroline Baum has more details:

"Is it stagflation or is it just normal, late-cycle
behavior of a lagging indicator?” says Paul Kasriel, director
of economic research at the Northern Trust Corp. in Chicago.
“In the stagflation of the ’70s, energy prices were rising
because of absolute declines in oil production. There was a
wage-price spiral because of strong unions. Neither of these
holds today.”

Inflation has the distinction of being a lagging economic
indicator. The change in the CPI for services is one of seven
components of the Index of Lagging Economic Indicators. A second
laggard is the change in labor cost per unit of output, or "wage inflation,” another faux concept. (Wages are the price
of labor. Inflation is a general rise in the price level.)

What that means is that over time, these indicators have
proved to turn up after the business cycle trough and down after
the peak.

"Inflation typically lags growth by about a year, so the
slowdown in growth since the spring of last year has only just
started to depress core CPI,” says Ian Shepherdson, chief U.S.
economist at High Frequency Economics in Valhalla, New York. "The process has much further to run.”

As always, interesting stuff from Ms. Baum.


Old Timers Can Tell You This Isn’t Stagflation
Caroline Baum
Bloomberg,       April 18 2007

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What's been said:

Discussions found on the web:
  1. spencer commented on Apr 18

    As someone who lived through the 1970s as a business economist the stagflation term is more a fiction then an accurate description of the 1970s. Yes, we had the inflation and there were frequent forecast of stagflation, 1%-2% real growth and high inflation. But the sub par growth never seemed to actually materialize.

    Growth was highly volatile but if you look at the actual data, growth was either above trend of negative. Moreover, average real growth for the 1970s was actually just as strong as it was in the 1980s.

  2. spencer commented on Apr 18

    I personally thing we are slipping into a stagnation scenario. But note I say stagnation, not stagflation.

  3. Baddriver commented on Apr 18

    “In the stagflation of the ’70s, energy prices were rising because of absolute declines in oil production. There was a wage-price spiral because of strong unions. Neither of these holds today.”

    Right, because the only way for energy prices to rise is from a decline in oil production and the only way for wage-price inflation is from strong unions. Since we don’t have those today it is impossible to have inflation right?

  4. super-anon commented on Apr 18

    Yesterday’s inflation report suggest we may be beginning to see the first signs of deflation creeping into highly discretionary consumer items:

    A sharp drop in apparel prices and soft gains in housing and medical costs kept underlying inflation in check last month, a government report showed, though overall inflation accelerated on the back of higher energy prices.

    We may be looking at the opposite of the situation we had in the past several years where increased borrowing allowed inflation to take place in the consumer sector, while producer costs remained fairly low. This is an ideal situation for corporate profits because they can raise prices faster than costs.

    Now this inflation has finally found it’s way back into the cost of doing business. If a credit crunch hit consumers and they have to stop spending less, then we see the situation suddenly reversed – business earnings would be heading for the cliff.

  5. REW commented on Apr 18

    The only point of Baum’s piece is that the MSM does tend to repeat the same stories, terms, etc. The term “stagflation” has been overused, and it clearly isn’t here yet. I have stated that the risks of stagflation are real and rising, but the economy is not in stagflation today.

    Baddriver, good observation.

    The real error in Baum’s piece is that she accepts (and parrots) the concept that slowing growth will reduce inflation. In this view, growth is slowing, and CPI lags growth, so inflation will fall soon. This is pure Keynesian nonsense, and it is the same trap limiting the FED today.

  6. Fullcarry commented on Apr 18

    Its surprising hearing Paul Kasriel and Ms Baum speak like that. They should know better. They make inflation sound like this exogenous force that has nothing to do with the supply and demand for money.

    It is somewhat disappointing how the economic discourse is deteriorating.

  7. patrick commented on Apr 18

    Why do so many people ignore the 800 pound gorilla in the room? How can we even begin to compare the 70’s to now, when the numbers have been massaged better than those Kobe cows? THIS blog covered some of the same issues with massaged numbers roughly 6 months ago!


    So, did we all forget? The numbers for M3, GDP, inflation & on and on have been reworked under new methodologies to arrive at the numbers. Growth is a JOKE! We aren’t growing except on paper! From the same site you guys pulled from it’s right here….


    So when M3 runs at 10%…this by definition (Austrian – superior) is inflation of 10% and growth is clearly negative. Do the math for YOUR household and tell me costs are not up 10% from just one year ago. NOT TO MENTION – WE PAY FOR ENERGY AND FOOD FOOLS, SO HOW CAN INFLATION NOT INCLUDE THIS?

  8. Ross commented on Apr 18

    Prices do not go up, you money’s purchasing power goes down! A subtle way to cheat my old man out of the promise of ‘social security’ and renig on past debts. Been going on since WWII. Government stastics. The oxymoron for all times. Recognize it for what it is. Social engineering. We are just further down the road to serfdom. No unions? Try outsourcing the cop on a beat or your plumber to India. Give it time and in a few years you will see inflation at 15% plus. We will mirror England of the 60″s and 70’s…

  9. Aerosushi commented on Apr 18

    “Wages are the price of labor. Inflation is a general rise in the price level.”

    I think Caroline is missing the point. The classical definition of inflation is not a general rise in the price level. True inflation is an increase in the money supply and credit over and above the supply of goods and services. The corollary is a decrease in the availability of goods and services with respect to the money supply.

    With this definition in mind, there is no lagging effect with respect to the cause of inflation, only in its effect on wages and prices. Of course, wages and prices can rise for other reasons such as an increase in the cost of producing goods or delivering services.

    What we are experiencing right now is both classic monetary inflation and credit expansion, and a gradual increase in the cost of the fuel of the economic engine: oil. It’s a double whammy, and I think it will be a big blow to the global economy when its effects really begin to be felt. Peak oil, anyone?

    IMHO, the other thing we are experiencing is a constant re-tooling of both CPI and PPI yardsticks to make price level increases (a result of inflation) appear lower than what most folks are experiencing in their daily lives. So much for indexed retirement vehicles.

    Perhaps we should be concentrating on the causes of the increase in price levels, and not the price levels themselves. It’s a more direct way of pointing the finger at flawed monetary, economic and energy policy.

  10. Phil commented on Apr 18

    John Williams, an economist, has a website called ‘Government Shadow Statistics’ that calculates the GDP, CPI, etc. using the pre-Clinton method, or the exact same time period, the 80’s, referred to in this article. Surprise, CPI is around 6 percent, GDP is negative.

    Who’s correct? I think you know.


  11. crack commented on Apr 18

    Wouldn’t all this be symptomatic of post 2k bubble global over capacity? It prevents broad inflation by preventing demand pull. It would indicate that cap-ex is unnecessary since the capacity is already there. Which would lead to more financial engineering since cash doesn’t need to be invested in capacity.

    It would also fit with inflation in segments such as health care. Health care doesn’t have the same over capacity since physicians available is kept artificially low. This leads to more capital spending to get the most out of the physicians available.

    From a housing perspective the extra liquidity injected in response to the stock bubble and 9/11 didn’t go towards cap-ex since capacity was already there. So it ended up in mortgages. Even with the cash-out refis capacity wasn’t exceeded so cap-ex and jobs didn’t materialize.

    If over capacity is the problem then what predictions could test it?

    The solution to our problems would be an increase in world wide demand. Either a lot of the wealth currently in the hands of capital needs to move to labor where it will get spent or, I guess a dollar revaluation vs. the renminbi. I’m sure there is a flaw in my logic somewhere, but it explains why Paulson is focused on the renminbi, gotta keep capital happy.

    Well this post was longer than I was expecting.

  12. M.Z. Forrest commented on Apr 18

    Depending on who you consult, poverty is defined as when you spend over 50% of your income on food and housing. The estimates vary, but roughly 15% households fit this demographic. Among those with a mortgage, a third spend more than 30% on their income on housing, the recommended level.

    Anyhow, I would be curious what the 20th or 40th percentile’s inflation picture is. I would speculate that it is near 8-10%. So, in the “Big Picture” if 50% of the population is experiencing inflation greater than 6% and wage growth below 2%, are they experiencing stagflation?

  13. wally commented on Apr 18

    I know that economists like to view everything in their own terms, but to me the long growth period from the early 1980s to about 2000 is suspiciously aligned with two things: the maturation of boomers through their work careers and the invention, spread and triumph of personal computers/ the internet.
    Those are one-time events just like the post WWII growth.

  14. Aerosushi commented on Apr 18

    Phil – the ShadowStats site suggests that price levels are actually rising at closer to a 10% pace than a 6% pace…


    The 6% figure is based on the pre-Clinton era measure of CPI you mentioned. The 10% figure is based on the ShadowStats yardstick for “true” CPI, whatever that is.

    Just a guess, but if Matthew Simmons is right about oil depletion, and John Williams is right about M3 and true CPI, then I don’t think this will end well…

  15. Bill King commented on Apr 18

    The March CPI increased the expected 0.6% but Core was 0.1 better than expected. Once again the necessities of life soared in price while other necessities exhibit bewildering benignity.

    Energy costs jumped 5.9% (gasoline +10.6%). Transportation costs increased 2.8%. Food increased only 0.3%, as did owner’s equivalent rent.

    The CPI release shows unfathomably low y/y increases in the necessities and near-necessities of life.

    Healthcare 3.96%, food & beverage 3.27%, education and communication 2.24%, and transportation 1.17% (probably due to hedonic adjustments for light trucks)

    The Cleveland Fed’s Median CPI increased 3.76% y/y. Numerous analysts and some Fed officials view this metric as a more accurate arbiter of core inflation.

  16. Stan commented on Apr 18

    “Peak oil, anyone?”
    No thanks, I’m still trying to digest ‘The Population Bomb’.

  17. cm commented on Apr 18

    spencer: Perhaps “stagflation” and “stagnation” are kind-of synonymous, “stagflation” essentially being “inflation without the growth”, as opposed to “inflation with growth”. I’m not sure there has been a “third way” over the last few decades. When did we last have price stability in necessities?

  18. donna commented on Apr 18

    Yeah, it’s not stagflation, because we’re letting the dollar take th ehit instead.

    Hope you didn’t want to go to Europe this summer, or Japan, or anywhere else outside the U.S…..

  19. Tom B commented on Apr 18

    “”Peak oil, anyone?”
    No thanks, I’m still trying to digest ‘The Population Bomb’.”

    Well, the two are intimately connected.

    “to me the long growth period from the early 1980s to about 2000 is suspiciously aligned with two things: the maturation of boomers”

    I wonder about that a lot. Did stocks go up in the ’90’s simply because way more people were buying them? What happens when boomers retire and maybe take money out of the market?

    Maybe somebody out there who studies the economy for a living could chime in and tell me what the pros believe on this issue.

  20. Aerosushi commented on Apr 18

    “Peak oil, anyone?”

    “No thanks, I’m still trying to digest ‘The Population Bomb’.”

    “Well, the two are intimately connected.”

    At best, the book was a terrific piece of fiction. The difference with the peak oil concept is that the only folks crunching numbers and modelling world production are the ones that are coming to the same conclusions:

    1. Conventional light sweet crude production is already peaking. There are no swing producers in this category. Saudis included.

    2. Heavier grades and deepwater, oilsands, etc require higher prices for the commodity. Exploration and production of these assets are expensive, and lower pricing will halt exploration into same. Expect higher prices moving forward.

    3. On a longer view at current growth rates, world oil consumption is pegged at about 120 mboe/d by 2020 (about 3%/yr demand growth). With current production at 85 mboe/d and a depletion rate of about 2% per year on the conventional 68 mboe/d now produced, how do we fill the gap?

    The gap works out to about 70 mboe/d by 2020. Basically we will need to produce 80% more of the black stuff by then.

    Tall order.

  21. John Thompson commented on Apr 18

    Energy isn’t factored into inflation though. 15$ gas is no problem in 2020. There will be tons more money from China and everywhere. So I guess that means uncounted inflation – true.

    Spencer had it right. STAGNATION. Money is worthless but debt is endless. Plantation economy

  22. Tom B commented on Apr 18

    “15$ gas is no problem in 2020. There will be tons more money from China and everywhere.”

    And the USD will be worth…….?

  23. Winston Munn commented on Apr 18

    I rarely lecture these days as: 1) I have no college degree, 2) I’ve never in my life taken a single class in economics or business, and 3) numbers 1 and 2 above limit the fees I can demand for my economic lectures.

    However, I can read; I can reason; I can use logic. In this day and age, those three items may trump all of the negaitive reasons above.

    It is odd to debate the causes and cures of inflation without a definiton of the term itself. Fortunately, others more educated than me find this odd as well:

    From an article by Frank Shostak: http://www.mises.org/story/2525
    “Despite the use of sophisticated mathematical and statistical techniques, the research paper never gets to the heart of the phenomenon of inflation. Covering undefined terms with mathematical dressing cannot make the analysis more meaningful if the object of the analysis is not clearly identified.”

    Part of the problem is the English language and the tendency to use substitutional words – we think of inflation in the same concept of inflated waistlines, inflated balloons, and inflated tires, i.e., a fattening, an expansion from the norm. We then tend to think of higher prices, higher costs, as an expansion from the norm, hence inflation.

    However, I do not think this is correct. Price movement is an economic phenomenon based on the law of supply and demand. We tend to simplify and say that money growth causes higher prices because of too many dollars chasing too few goods – but the expansion of money has no effect on the price of a product that no one wants to buy. It is still a divergence of demand from supply that causes price movements.

    So all the imaginary measuring of “inflation” is simply a measurement of price changes, and not actual inflation.

    The core of inflation – what inflation is and can never be anything else – is a debasement of money. This debasement of money, however, has no direct effect on prices. One might argue that the huge climb in the average price in homes was a direct effect of money expansion (debasement); I would say this an innaccurate assumption. The increase in home prices was a direct effect of easy credit that spurred demand, which caused a divergence from supply. (Easy credit is not inflationary although it encourages money expansion which is inflationary. If no one borrowed, there would be no inflation. But interest rate targets can effect demand for money.)

    I am supported in this view by Minyan Mish at http://www.minyanville.com/articles/Fed-Interest+Rates-Funds-Economy/index/a/12489.
    “…the Fed has an interest rate target (as opposed to a money supply target) the Fed is not pumping money per se, the Fed is defending an arbitrary target that it has established, no more no less. Thus it is not the Fed initiating anything, the Fed is merely meeting demand for money at the arbitrary target they set.”

    If this is the case, then what is the purpose of inflation? Simply, inflation is a method of accumulation of wealth without work. Inflation is alchemy.

    Suppose a country ran on a strict economy of gold coin. The ruler of this country ordered all gold coins to be delivered to him and a new coin was to be issued by fiat (decree) that would hold the same value as the previous gold coin. But what the ruler in fact did was take 1/2 the gold from every coin for himself and issue the new 1/2 gold coins that he decreed was to have the same value as the old. The money has been debased as its real value has been decreased while the ruler has increased his wealth.

    And that is the proper definition of inflation – an increase in the ruler’s wealth with no corresponding output of labor by simply debasing the money. Therefore money expansion IS inflation.

    Is it any wonder the Federal Reserve does not want to worry about money supply and instead focus on interest rates? If they controlled money supply, interest rate would fluctuate based on supply and demand, but the government’s wealth would not build due to restricted currency growth; however, by concerning themselves with interest rates and protecting the low rate by increasing currency, they automatically expand (inflate) the government’s wealth.

    Wiser people than me agree: From an article by Antony Mueller at http://www.mises.org/story/2462
    “Central bankers sometimes describe their activity as “more art than science,” which is implicit recognition of their ignorance. The “art of central banking” is the art of pretending to know what one does not know. Not only is it not a science; it is not even an art. At best it is alchemy; at worst it is a gigantic cheat.”

    So all the concern over inflation, deflation, stagflation, and stagnation is irrelevant, because under it all is economics, the law of supply and demand that determines prices, while earnings ultimately determince a company’s worth.

    Everything else is window dressing.

  24. A Dash of Insight commented on Apr 18

    When Fundamentals and Perceptions Collide

    What action is right when market perceptions conflict with fundamental valuation methods? Let us put aside whether our valuation or the market perception is correct, and turn to the interesting case where there is conflict between the two. For Warren

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