Stagflation: An Ugly Word Rears its Ugly Head
Stagflation, by dictionary definition: an economic phenomenon “characterized by sluggish economic growth and high inflation” (American Heritage New Dictionary of Cultural Literacy). And in practical terms: slow growth and rising price levels is a dangerous economic mix.
It’s an ugly scenario, and the possibility is looming on the horizon. And last week’s FOMC release from the Federal Reserve left a sour aftertaste: “Inflation has picked up in recent months…Increases in the prices of energy and other commodities have pushed up inflation in recent months”.
Even more unnerving to consumers is that, while acknowledging price increases, the Fed believes “longer-term inflation expectations have remained stable and measures of underlying inflation are still subdued”. Those words are no comfort to already strapped consumers who are feeling additional pricing pressure.
What’s really troubling are the Fed’s latest economic projections: back in January the economy was expected to expand 3.4 to 3.9% this year…now the Fed is looking for growth of 3.1 to 3.3%. And while growth expectations are slowing, inflation expectations are ramping up: personal consumption expenditure inflation will rise 2.1 to 2.8% this year…up from previous estimates of 1.3 to 1.7%.
Expectations are moving decisively in the wrong direction. But the Fed maintains pricing pressures are viewed as “transitory”, with core CPI still below the target of 2%. But, again, that core inflation measure doesn’t hold much weight with consumers facing steep price increases. Over the past 12 months, the food index is up 2.9%, the energy index is up 15.5%, and the gasoline index is up 27.5%.
The problem, of course, is that while consumers are feeling the pinch of higher prices, wages are not rising in tandem. And there are both structural and cyclical reasons that will maintain pressure on salaries. According to The Wall Street Journal: structurally, declining union membership has erased wage bargaining power (union membership fell to 11.9% of workers last year). And cyclically, a massive overhang of unemployed and underemployed are holding wages down.
On the upside, things have been worse. We faced an ugly bought of stagflation back in the late1970’s: from 1979 to 1981 real GDP gained an average 1.8%. Meanwhile the consumer price index jumped an average 11.7% (Wall Street Journal).
The bottom line: personal consumption expenditures rose 3.8% in the first quarter, the fastest pace since 2008 (according to MarketWatch), and the consumer price index rose 2.7% in March (year-on-year). And at the same time, economic growth slowed to a modest 1.8%. There’s simply no way to spin those numbers to make them sound good.