Stagflation is HERE
April 30th, 2008 by Ana
Y’all have heard me gripe and grumble about the Fed cutting interest rates, with my main concern being inflation or even worse stagflation. Break out the polyester leisure suits and disco albums (yes, vinyl LPs), because it looks pretty official to me: Stagflation has returned to the U.S.
Short definition of stagflation
Stagnant economic growth or recession coupled with higher level of inflation.
The president is currently denying that we are in a recession right now (Wow, he not only looks like his father but now he sounds like him as well!). Technically, he is right when you apply the classic textbook definition of recession, which is two quarters of economic contraction. The official government numbers say we haven’t had actual economic contraction, but the anemic “growth” of 0.4% and 0.6% would put snails to shame. Basically, the economy is moving about as fast as swamp water … stagnant, in short.
Inflation numbers DO lie
Now for the other half of stagflation, which is inflation (prices inflate like a balloon). The “normal” government numbers show an annualized inflation for the past month of 4%, but then they get downright sneaky and strip out food and energy prices for some (male bovine excrement) figure they call the “core inflation” figure. I’ve made several snarky remarks about how Ben Bernake must not eat or drive to think the core inflation number is anywhere near realistic.
Doing a little digging around on the web I have discovered the government has changed how they figure inflation several times, and each change they make doctors up the numbers to make things sound much rosier than they are. Sit down and hang on to your hats, because here is a graphical representation of MY budget reality versus the government’s rose-colored glasses:
(original article and image source here)
That’s a huge difference in figurings! And when you take into consideration food and gasoline, that top line reflects how I had to adjust my budget for April … and how I’ll be working the numbers again for May.
Stagnant Economy + Inflation = STAGFLATION
There you have it folks, stagflation is back … I am not at all happy about having seen this coming either. Supposedly the members of the FOMC are old enough and educated enough to have seen the signs of this economic catastrophe sooner and clearer than I could have! Yet they have been on an interest rate cutting spree reminiscient of those 70s slasher horror films in hopes of keeping the Wall Street markets happy and every consumer in America spending like before (at unsustainable levels).
This could have been avoided. Energy costs, especially oil, are priced in dollars and the dollar has fallen with just about every rate cut. Even OPEC says the price of oil wouldn’t be nearly as high if the dollar was stronger. This round of stagflation is on Ben Bernake and seven others in the FOMC - excluding inflation hawk Richard Fisher of the Dallas Fed and recently Charles Plosser of the Philly Fed.
I’ll do some rooting around and asking the older generations how to survive stagflation and report here when I come up with something good. In fact, I’ll make it my post-finals project, hopefully starting tonight. Until then, turn on the 1970s classic rock radio station to get into the mood … the angrier the better.
Posted in stagflation survival, investing |
April 30th, 2008 at 7:05 am
Hmm, interesting chart. It’s not the best time to be starting out in life, things are just as… uncertain in the UK
April 30th, 2008 at 10:20 am
In response to your Twitter I think you are getting less comments because you explained the topic so well!
I can’t wait for your post about how future generations survived this. Should be interesting…
April 30th, 2008 at 10:59 am
This is a very thorough post - thanks for putting this together. I remember the term “stagflation” from economics, but formal educational explanation made far less sense than yours.
April 30th, 2008 at 3:43 pm
Stagflation is back … although I’m too young to remember when it was here in the 70’s, my aunt assured me it was no fun. I think everyone just lived with a tight budget and didn’t have the kind of expectations for money and things so many in our generation seem to have. Looking forward to your next post on the topic!
April 30th, 2008 at 6:32 pm
I hate to break it to you, but the 4% inflation number from the BLS is the ‘all items index’ and their CoreCPI (excluding Energy and Food) is 2.4%. The energy index was 17% and food index 4.5%.
If you have proof that they are lying, why not post that instead.
It’s just like the unemployment rate is only 5.1% and some percent, but the participation rate is only 66%, so really there are 232,995,000 people and 145,969,000 employed. That very obviously makes 5.1% right unemployed right? Actually, it’s 62.6% are employed making 37.4% of them not working. It’s all how you look at the stats and how you define unemployed.
May 1st, 2008 at 12:11 am
There are lies, lies and damn statistics. Winston Churchill, I think it was who said this.
And none cleverer than politicians at presenting statistics.
You have pointed out some sober facts, and I look forward to your stories on how people before us went through such periods.
May 1st, 2008 at 7:49 am
fathersez: Yup, I’ve heard that one attributed to Winston Churchill as well, although the version I heard was “There are lies, damn lies, and then there are statistics.” I took a stats class in the fall of 2005, and still have my old textbook around here somewhere.
May 1st, 2008 at 12:19 pm
I rarely believe statistics unless I know the exact source of where they came from but Government’s love them. We have the same problem here in the UK, static economic growth and an inflation rate that doesn’t include rises in energy prices which have shot up.
May 1st, 2008 at 1:17 pm
Actually Make Friends, Earn Money the UK has both the CPI and the RPI and both include electricity, gas, and other fuels.
Where do you guys come up with this stuff? You can very easily get this stuff from the Stats Canada, the BLS, or the ONS in their respective areas.
May 1st, 2008 at 2:16 pm
Traciatim: This report at the BLS website details the changes in 1998 and 2002 specifically, and describes several changes and the criticsms of the changes. It was written in 2006.
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