Why This Isn't Stagflation

Wednesday, April 18, 2007 | 07:03 AM

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 holds today.''

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 the peak.

"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
Caroline Baum
Bloomberg,       April 18 2007

Wednesday, April 18, 2007 | 07:03 AM | Permalink | Comments (23) | TrackBack (1)
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Tracked on Apr 18, 2007 10:20:49 PM


As someone who lived through the 1970s as a business economist the stagflation term is more a fiction then an accurate description of the 1970s. Yes, we had the inflation and there were frequent forecast of stagflation, 1%-2% real growth and high inflation. But the sub par growth never seemed to actually materialize.

Growth was highly volatile but if you look at the actual data, growth was either above trend of negative. Moreover, average real growth for the 1970s was actually just as strong as it was in the 1980s.

Posted by: spencer | Apr 18, 2007 8:58:35 AM

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