Is Stagflation Back?
Chart of the Week for March 14 - March 20, 2008
The term "stagflation" refers to an economy whose prices are rising while output is falling. Economists currently differ whether stagflation is where the U.S. economy is headed. As the graph illustrates, inflation as reflected in the Consumer Price Index ("CPI") has trended upward since November 2006. Analysts explain this increase by looking at many factors including rising energy prices and actions by the Federal Reserve to regulate the money supply. Meanwhile, declines in the housing market and reduced access to credit appeared to have dragged down economic growth as reflected in the drop in the 4th quarter 2007 Gross Domestic Product ("GDP"). The recent unfavorable employment numbers and record high oil prices are not yet reflected in the numbers above and could further negatively affect GDP and CPI. The convergence of continued or rising inflation (CPI) and lower economic growth (GDP) has lead to talk about stagflation.
Though some similarities exist between today's economic environment and the stagflation of the 1970s, the jury is still out. Many economists point out that false stagflation signals appear in many economic downturns and inflation has accelerated before or during such downturns since 1961. Usually, inflation retreats as economic growth slows. This lessens demand for goods and services, thus making occurrences of long-term stagflation infrequent.
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