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
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
"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
Bloomberg, April 18 2007