Is Stagflation Back?

Chart of the Week for August 18-24, 2006

The term stagflation refers to an economy where prices are rising while output is falling, and some speculate that this is where the US is headed. As the graph shows, inflation has generally been on the rise since late last year. Analysts explain this with many factors including rising energy prices and actions by the Federal Reserve to regulate the money supply. In conjuction, rising interest rates are slowing economic growth, which fell during Q2, and some expect to fall further by the end of this quarter. Employment numbers are also down.

Though some similarities exist, economists feel the situation today is different and much milder than the last period of stagflation in the 1970s, which was a difficult time. They feel growth and inflation are at reasonable levels. Going forward, the Fed will have to tread carefully to control inflation without hurting growth.

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