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/ Wednesday, June 1, 2022
Worry about stagflation begins to grow It is a blast from the past that many economists fear
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Paul Wiseman – The Associated Press
ASHINGTON (AP) — Stagflation. It was the dreaded “S word” of the 1970s. For Americans of a certain age, it conjures memories of painfully long lines at gas stations, shuttered factories and President Gerald Ford’s much-ridiculed “Whip Inflation Now” buttons. Stagflation is the bitterest of economic pills: fear, reflected in shrunken stock prices, is that the High inflation mixes with a weak job market to Fed will end up botching it and will clobber the cause a toxic brew that punishes consumers and economy without delivering a knockout blow to befuddles economists. inflation. For decades, most economists didn’t think such This month, former Fed Chair Ben Bernanke a nasty concoction was even possible. They’d long told The New York Times that “inflation’s still too assumed that inflation would run high only when high but coming down. So, there should be a the economy was strong and unemployment low. period in the next year or two where growth is But an unhappy confluence of events has low, unemployment is at least up a little bit and economists reaching back to the days of disco inflation is still high.” and the bleak high-inflation, high-unemployment And then Bernanke summed up his thoughts: economy of nearly a half century ago. Few think “You could call that stagflation.” stagflation is in sight. But as a longer-term threat, it can no longer be dismissed. What Is Stagflation? Last week, Treasury Secretary Janet Yellen There’s no formal definition or specific statistical invoked the word in remarks to reporters: “The threshold. economic outlook globally,” Yellen said, “is Mark Zandi, chief economist at Moody’s challenging and uncertain, and higher food and Analytics, has his own rough guide: Stagflation energy prices are having stagflationary effects, arrives in the United States, he says, when the namely depressing output and spending and unemployment rate reaches at least 5% and raising inflation all around the world.” consumer prices have surged 5% or more from a Last Thursday, the government estimated year earlier. The U.S. unemployment rate is now that the economy shrank at a 1.5% annual rate just 3.6%. from January through March. But the drop was In the European Union, where joblessness due mostly to two factors that don’t reflect the typically runs higher, Zandi’s threshold is different: economy’s underlying strength: A rising trade gap caused by Americans’ appetite for foreign products 9% unemployment and 4% year-over-year inflation, in his view, would combine to cause stagflation. and a slowdown in the restocking of businesses Until about 50 years ago, inventories after a big holiday economists viewed stagflation as season buildup. a near-impossibility. They hewed For now, economists broadly to something called the Phillips agree that the U.S. economy Curve, named for its creator, has enough oomph to avoid economist A.W.H. “Bill’’ Phillips a recession. But the problems Stagflation (1914-1975) of New Zealand. This are piling up. Supply chain occurs when high theory held that inflation and bottlenecks and disruptions from inflation and unemployment move in opposite Russia’s war against Ukraine have slow economic directions. sent consumer prices surging at growth happen It sounds like common sense: their fastest pace in decades. simultaneously. When the economy is weak and The Federal Reserve and other lots of people are out of work, central banks, blindsided by businesses find it hard to raise raging inflation, are scrambling to prices. So, inflation should stay catch up by aggressively raising interest rates. They hope to cool growth enough to low. Likewise, when the economy is hot enough for businesses to pass along big price hikes to their tame inflation without causing a recession. customers, unemployment should stay fairly low. It’s a notoriously difficult task. The widespread
In fact,
The economic outlook, globally, is challenging and uncertain, and higher food and energy prices are having stagflationary effects. Janet Yellen U.S. Treasury Secretary
Somehow, reality hasn’t proved so straightforward. What can throw things off is a supply shock — say, a surge in the cost of raw materials that ignites inflation and leaves consumers with less money to spend to fuel the economy. Which is exactly what happened in the 1970s. Saudi Arabia and other oil-producing countries imposed an oil embargo on the United States and other countries that supported Israel in the 1973 Yom Kippur War. Oil prices jumped and stayed high. The cost of living grew more unaffordable for many. The economy reeled. Enter stagflation. Each year from 1974 through 1982, inflation and unemployment in the United States both topped 5%. The combination of the two figures, which came to be called the “misery index,” peaked at a most miserable 20.6 in 1980.
Has Stagflation Arrived?
No. For now, the stagflation glass is only half-full. There’s “flation’’ for sure: Consumer prices shot up 8.3% in April from a year earlier, just below a 41-year high set the previous month. Consumer prices are surging largely because the economy rebounded with unexpected vigor from the brief but devastating pandemic recession. Factories, ports and freight yards have been overwhelmed trying to keep up with an unexpected jump in customer orders. The result has been delays, shortages and higher prices.
