Posts Tagged ‘stagflation’

Stagflation Rears Its Ugly Head

Wednesday, September 21st, 2011

The Consumer Price Index (CPI) climbed by 0.5 percent in July, according to a Labor Department report.  That came after a decrease of 0.2 percent the previous month.  Rising inflation cuts consumers’ buying power.  Average pay, when adjusted for inflation, fell in July and has declined by 1.3 percent in the last year.  Over the last 12 months, prices have gone up 3.6 percent.  Core prices over the last year have risen 1.8 percent — the largest increase since December of 2009. 

“Once again, the consumer was pushed to the wall by rising retail costs,” said Joel Naroff, chief economist at Naroff Economic Advisors.  “It’s bad enough that workers are not getting any pay increases but the surge in retail prices is cutting into spendable income.”  Although many economists and the Federal Reserve expect that higher food and energy prices will prove short lived, that offers little good news to Americans who must find the money to pay for food and gas.  “This is not welcome news for Fed officials who are trying to justify QE3,” First Trust analysts said.

The news also raises the specter of stagflation, a circumstance when the inflation rate is high and the economic growth rate is slow.  Writing for CBS Money Watch, Dan Burrows says that “Prices are growing rapidly but the economy is not.  Sound familiar?  It’s called stagflation — something we haven’t had in three decades — and markets are getting more jittery about its possibility with each passing data point.  A stagnant economy plus inflation equals stagflation, and it could actually be worse for American households this time around, should it come to pass.  Yes, inflation rates of three percent to four percent are nothing compared to the double-digit inflation Americans lived with in the 1970s and early 1980s.  But then households were in much better shape back then because they carried much less debt, be it through mortgages, home equity loans, credit cards or student loans.”

The Hill’s Vicki Needham writes that “The energy index has risen 19 percent over the past year.  Overall, food prices increased 0.4 percent in July, with larger increases in dairy and fruit prices.  The cost of meat, coffee and vegetables all increased.  The core index, excluding volatile food and energy, was up 0.2 percent, slightly below the 0.3 percent increase in each of the previous two months.  Prices are up 3.6 percent from a year ago, the same amount as in May and June.  Core prices are 1.8 percent higher than they were a year earlier, the largest increase in two years, with rent and the rising cost of hotels pushing up housing prices by the most in three years.  Although prices are up, the index of core prices, used by the Federal Reserve to gauge inflation, is within the target range of 1.5 and two percent.  Core consumer inflation is expected to remain between 1.5 and 1.8 percent this year, the Fed has said.  The cost of apparel increased sharply last month, as clothing prices were up 1.2 percent, the third consecutive month of increases.  Clothing costs have increased 3.1 percent during the past 12 months, the largest yearly increase since July 1992.”

With an economy sluggish, and many calling a recession inevitable, the latest CPI number fits with recently released Producer Price Indexes (PPI) which showed prices rising throughout different levels of production.  While recessions are usually deflationary, rising measures of inflation have sparked fears of stagflation.

Surprisingly, the Chicago area was relatively immune to July’s inflationary numbers.  Consumer prices in metropolitan Chicago declined 0.4 percent in July from June as energy prices fell, according to the Labor Department.  With the exception of food and energy, prices were also down 0.4 percent.  Compared with last year, prices rose 3.2 percent and there was a 17.8 percent spike in energy costs.  When food and energy are taken out of the equation, prices rose 1.6 percent compared with last year.  Food prices remained the same as June, but rose 3.5 percent from July 2010.  Energy prices declined one percent from June as gasoline prices dropped 4.2 percent.  Gas prices were 37.3 percent higher than in 2010.  The biggest price declines were in education and communication, down 3.8 percent; clothing was down 2.6 percent; and transportation was down 1.7 percent.  Housing costs rose 0.5 percent.

Is QE3 On the Horizon?

Tuesday, June 21st, 2011

Now that QE2 (quantitative easing 2) is winding down – and with the economy sputtering – will Federal Reserve chairman Ben Bernanke call for a new round of stimulus in the form of QE3? The answer likely is “no”, although it’s doubtful that the Fed will tighten monetary policy until the economy is stronger.  The central bank’s strategy has been to buy Treasury bonds to increase the money supply and foster growth.  The second round of such purchases, worth $600 billion, ends June 30.

Writing in the Washington Post, Neil Irwin says that “The lousy unemployment report comes on the heels of other disappointing economic data, but Fed officials view the current situation as different from the conditions that led to last year’s bond buying.  The recent round of data is neither alarming enough nor definitive enough to make them reconsider the unconventional monetary policy.  For one, much of the economic slowdown in the first half of the year was likely driven by temporary factors.  The Japanese earthquake and tsunami appear to have disrupted the supply chain at U.S. factories more than initial forecasts, contributing to the drop in manufacturing activity and May’s sluggish employment report.  And although oil prices spiked earlier in the year, they have ebbed downward since late April.”

Mohamed A. El-Erian, CEO and Co-CIO of Pimco, agrees, noting that “Notwithstanding the historical parallel, I suspect that it is very unlikely that there will be a QE3.  This view is based on an assessment of economic, political and international factors.  As Chairman Bernanke noted in his August Jackson Hole speech, and reiterated in his first press conference, policy measures should be judged in terms of the expected balance of benefits, costs and risks.  I suspect that there is now broad agreement that, in the case of QE3, this balance has shifted: lowering the potential gains and increasing the probability of collateral damage and adverse unintended consequences.  It is also clear that, in its attempt to deliver ‘good’ asset price inflation (e.g., higher equity prices), the Fed also got ‘bad’ inflation.  The latter, which essentially took the form of higher commodity prices, is stagflationary in that it imposes an inflationary tax on both production and consumption — thus countering the objective of QE2.”

There’s also the point that QE2 has had mixed results.  According to Bernanke, “Yields on 5- to 10-year nominal Treasury securities initially declined markedly as markets priced in prospective Fed purchases; these yields subsequently rose, however, as investors became more optimistic about economic growth and as traders scaled back their expectations of future securities purchases.  Equity prices have risen significantly, volatility in the equity market has fallen, corporate bond spreads have narrowed, and inflation compensation…has risen to historically more normal levels.”

Philadelphia Fed President Charles Plosser warns that QE2 provides excessive stimulus: The central bank has “a trillion-plus excess reserves,” he noted, which could be “the fuel for inflation.”  Anticipated inflation could explain the sudden increase in long-term yields that began last November.  But the rate for 10-year Treasury Inflation Protected Securities (TIPS), rose at the same time, which contradicts that interpretation.  At the same time, the five-year TIP rate didn’t rise.  Had that rate increased, there would have been a sign of a stronger economy in the next five years.


UBS thinks that QE2 failed and is strongly opposed to another round of stimulus.  Maury N. Harris, UBS’ Managing Director and Chief Economist for the Americas, says that “The evidence that QE2 boosted economic activity is lacking.  Yields moved higher and equity markets did as well, although the latter was justified by rising corporate earnings.  They importantly reflected better volumes, which probably cannot be traced to any believable instantaneous response to policy that works with a lag.  Despite the recent weakness in the data, we continue to view the recent slowing as insufficient to prompt further QE from the Federal Reserve.  Relative to conditions in August 2010, when QE2 was floated by Chairman Bernanke, labor market conditions are better.  Additionally, the threat of disinflation last fall has given way to a somewhat more disturbing build-up in inflation pressures as core inflation continues to accelerate.”

Fed Chairman Bernanke Takes Steps to Restart the Economy

Friday, November 7th, 2008

Ben Bernanke has spoken.  The Fed chairman and the Federal Reserve moved recently to stimulate the economy when the policy-making committee cut the federal funds rate – the rate at which banks lend to each other – to just one percent.  This represents a half percentage point cut from the previous 1.5 percent rate.  By contrast, during the summer of 2007, this rate was 5.25 percent.

There is more good news.  Treasury rates have stabilized.  The value of the dollar and the yen are soaring.  The price of oil has fallen to less than $70 a barrel.  The New York Stock Exchange rose nearly 900 points in a single day, following the lead of markets ranging from Tokyo to Hong Kong to London.  The inflation rate is just 4.9 percent.  Unemployment is 5.7 percent – a lower proportion than was seen during previous recessions of recent decades.

And, according to NAI Global’s recent Capital Markets Update, the doomsayers who describe the current situation as “the worst economic situation ever” either are very young or have short memories.  The seemingly endless stagflation of 1973 – 1981 was far worse; so was the collapse of the savings-and-loan industry from 1989 – 1993.  The dot.com failure and September 11 wiped out more wealth when compared with the GDP.

Commercial real estate is in far better shape than the early 1990s, thanks to lower vacancy rates, higher rents and shorter construction pipelines.  Delinquency rates are virtually non-existent, though that situation could easily change.  Published in September of 2008, NAI Global’s report projects that recovery will occur within nine to 15 months.

Paul Volcker: U.S. Is in a Recession

Wednesday, October 22nd, 2008

“It’s not going to be a problem in the short run.  Inflation doesn’t flourish in the face of recession,” said Paul Volcker, who served as chairman of the Federal Reserve from 1979 until 1987.  “It’s something we have to worry about when we get out of this recession.  I have been around for a while.  I have seen a lot of crises, but I have never seen anything quite like this one.  This crisis is an exception.  I don’t think we can escape damage to the real economy.” Volcker believes that the United States is officially in a state of recession.  In a Reuters’ article, Volcker affirms that stabilizing the financial system to ease the credit crisis is a government priority, even if it requires significant intrusion into the private sector.

“The first priority is to stabilize the financial system.  It is necessary, even though the cost is heavy government intrusion in markets that should be private,” Volcker told an audience at a seminar in Singapore.  “Housing prices in the U.S. are still declining.  There are more losses to come.”

Volcker, who is credited with battling the double-digit inflation of the 1970s, believes that the massive infusion of liquidity by the Federal Reserve ultimately could result in inflation or even stagflation.

Volcker is currently chairman of the board of trustees of the Group of 30, an international body composed of central-bank governors, leading economists and private financial-sector experts.  Additionally, the former Federal Reserve chairman is serving as an economic advisor to Barack Obama’s presidential campaign.