I’m going to tackle the daunting task of explaining stagflation today, not only because it is in the news quite a bit recently, but also because it can really mess with the beginning investor.  First, the definition courtesy of wikipedia:

a period of inflation combined with stagnation (that is, slow economic growth and rising unemployment, possibly including recession) … First, stagflation can occur when an economy is slowed by an unfavorable supply shock, such as an increase in the price of oil in an oil importing country … Second, both stagnation (recession) and inflation can be caused by inappropriate macroeconomic policies …

OK, enough with the economic jargon, let’s break this puppy down into terms the normal person can understand.  Since stagflation is most commonly associated with the 70s here in America, start up some appropriate background music LOL like disco or funk or classic rock.

• Stagnation:  This is pretty easy to get a handle on.  It means the economy isn’t moving forward.  Another common term popping up in the news today is recession.  The stock market will look BLAH and the unemployment rate will increase.  At the very end of the 70s and very beginning of the 80s, the unemployment rate hit over 10% which is at least double what we have now.
• Inflation: Where the price of normal every day necessary items like food and gasoline increase sharply; that is, they inflate like a ballooon.  Inflation in the 70s was spurred by the two Oil Shocks here in America (1973 and 1979).
• Inappropriate macroeconomic policies: Translation of this one is the central banks fumble the economic football.  Umm, gee, haven’t I (and others) been accusing the Fed of this one recently?  Granted, I am just an overeducated pizza delivery driver with a blog and a lot of opinion LOL but I am starting to see real economists and TWO of the ten voting memebers at the Fed saying this.

I found this interesting little tidbit buried deeper in the wikipedia page:

The way this plays out is that after supply shock occurs, the economy will first try to maintain momentum - That is, consumers and businesses will begin paying higher prices in order to maintain their current level of demand. The central bank may exacerbate this by increasing the money supply in an effort to combat a recession. For example, by lowering interest rates. The increased money supply props up the demand for goods and services when it would normally drop during a recession.

So, with a basic stripped down definition and a lot of opinion, do I think we are headed for stagflation?  I sure hope not!  If we bring back stagflation, people may start wearing those hideous polyester leisure suits and playing disco again!  Ewwww! 

Not only that, but stagflation helped keep the stock markets stagnant for a decent portion of the 70s, to the point that people were saying equity investing was dead.  Of course, the ones who stayed in the stock markets made out like bandits when it recovered by the mid-80s.

The problem I see is the Fed slashing the interest rates is sounding way too much like the wikipedia version of “how to bungle inflation and stagflation.”  I sincerely hope things don’t get to the point where it can’t be fixed, because my parents hated the 70s and early 80s for the economic misery and their vitriolic opinions about Richard Nixon, Gerald Ford, and Jimmy Carter could peel paint off the walls.  Just about every Baby Boomer I’ve met has the same low opinion of those three presidents and that time period.  Which reminds me, most Baby Boomers’ retirement funds would be hard-pressed to survive another round of stagflation.

OK, stagflation survivors: here’s your chance to weigh in, correct this Gen X “kid” or just give your predition from those who have seen it before.  Are we heading into another round of stagflation?