Most Popular
1. Dow Max Drawdown Bear Stock Market 2022 - Accumulating Deviations from the Highs - 21st Feb 22
2.Putin Starts WW3 in Ukraine, Will Use Tactical Nuclear Weapons, China Prepares Taiwan Blitzkrieg - 28th Feb 22
3.World War 3 Phase 1 - Putin WINS Ukraine War! - 25th Feb 22
4.INVESTORS SEDUCED by CNBC and the STOCK CHARTS COMPLETELY MISS the BIG PICTURE! - 10th Feb 22
5.Will There Be A 2024 US Presidential Election? - 3rd Mar 22
6.Gold and SIlver, Precious Metals Sector Is at a Terrific Buy Spot - 6th Feb 22
7.Why Putin Wants the WHOLE of Ukraine - World War 3 Untended Consequences - 6th Feb 22
8.Dow Stock Market Expected Max Drawdown 2022 - 19th Feb 22
9.Stock Market Calm In the Eye of the Inflation Storm - 4th Mar 22
10.M = F - Everything is Waving! Stock Market Forward Guidance - 7th Mar 22
Last 7 days
Why APPLE Could CRASH the Stock Market! - 21st May 22
Why Is Crude Oil Ignoring US Inventories? - 21st May 22
Here is Why I’m Still Bullish on Gold Mining Stocks - 21st May 22
THE INFLATION MEGA-TREND QE4EVER! - 20th May 22
US Real Estate Investors – Is There An End In Sight? - 20th May 22
How Technology Affected the Gaming Industry - 20th May 22
How To Set And Achieve Reasonable Goals For Your Company - 20th May 22
How Low Could the Amazon (AMZN) Stock Price Fall? - 19th May 22
Bitten by FANG? Clocked by Cryptos? -- 'Air Pockets' Everywhere - 19th May 22
Northern General Hospital Orthopedics Fractures and and Ankle Clinic Consultations Real Patient Experience - 19th May 22
Cathie Wood Goes All in on Teladoc, ARKK INSANE Noob Investing Strategy! - 17th May 22
This is Anything but Positive for US Housing Market - 17th May 22
What Should We Do If There Is No Fed Monetary Policy Pivot? - 17th May 22
All Possible Ways to Earn Free Litecoin - 17th May 22
How low Could the Amazon Stock Price Fall? - 16th May 22
Cathy Wood ARKK INSANITY There is NO Coming Back! - 16th May 22
NASDAQ 100 Stock Market LOWER LOWS & LOWER HIGH - 16th May 22
Sanctions, trade wars worsen US inflation - 16th May 22
AI Tech Stocks Earnings BloodBath Buying Opportunity - 14th May 22
Futures Contract – Trading Crude Oil With USO - 14th May 22
How to Get Kaspersky Internet Security for 80% Discount! Do not Pay Renewal Price! - 14th May 22
Sagittarius A* Super Massive Black Hole Monster at Centre of Our Galaxy REVEALED! - 14th May 22
UK Public Debt Smoking Inflation Gun - 13th May 22
What Happens When the Stock Market Dip Keeps Dipping? - 13th May 22
Biden Seeks Inflation Scapegoats; Gold Advocate Wins GOP Primary - 13th May 22
Apple and Microsoft Nuts Are About to CRACK and Send Stock Market Sharply Lower - 12th May 22
The War on Gold Ensures the Dollar’s Downfall - 12th May 22

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Threat of Economic Stagflation Looms as Prices Rise Despite Bad Economy

Economics / Stagflation Aug 19, 2011 - 10:22 AM GMT

By: Money_Morning

Economics

Best Financial Markets Analysis ArticleDavid Zeiler writes: Few are willing to acknowledge the threat of stagflation, but reports showing inflation rising more quickly than expected - even as growth is slowing - indicate that this scourge of the 1970s may be stalking the U.S. economy.

Every economic report nudges the United States closer to the definition of stagflation - a condition marked by slow economic growth, high unemployment, and soaring prices.


Although many economists believe the sluggish economy will moderate inflation, that's not what happened in the 1970s.

"The belief that you can't have inflation and high unemployment is nonsense; we had 25% inflation in the U.K. in 1975, in the middle of a recession," said Money Morning Global Investment Strategist Martin Hutchinson.

Hutchinson has repeatedly warned Money Morning readers that the U.S. Federal Reserve's easy money policies would lead to inflation without fostering economic growth.

In the past couple of months, Hutchinson's fears have been realized.

The Stark Reality
The July consumer price index (CPI), released yesterday (Thursday) by the U.S. Labor Department, increased 0.5% from June - more than double the 0.2% economists had expected.

The Labor Department's producer price index (PPI) report for July, which tracks what businesses pay for goods, rose 0.2% - also twice what economists had expected.

Economic growth, meanwhile, has been sluggish at best. The economy expanded by just 1.3% in the second quarter, following 0.4% growth in the first quarter. A healthy economy should have a gross domestic product (GDP) growth of 3% or higher.

Yesterday's weekly jobless claims report also inched higher, to 408,000, which suggests little progress is being made on reducing the 9.1% unemployment rate. What's more, the report showed hourly wages falling 0.1% in July and 1.3% from a year earlier, making it difficult even for those who have jobs to cope with the rising prices.

In yet another report yesterday, the Philadelphia Federal Reserve Bank said factory activity in the mid-Atlantic region fell from +2 in July to -30.7 in August - its lowest level since March 2009. Readings below zero indicate shrinking manufacturing activity.

If the Fed and government lawmakers continue to ignore the threat of stagflation - Fed Chairman Ben S. Bernanke has repeatedly downplayed inflation concerns - the stage will be set for a long and painful climb out of a deep economic morass.

"When this happened before -- back in the 1972-73 time frame -- it took a full decade of punishingly high interest rates and the commitment of a Fed chairman named Paul A. Volcker to solve," Hutchinson said.

Numbers Games
Chairman Bernanke tends to brush aside the usually higher overall CPI number in favor of the so-called "core" inflation number that excludes food and fuel costs. In July core inflation rose just 0.2%, far less than the 0.5% jump in the overall CPI.
Food and fuel, along with clothing, have been among the categories showing the highest increases. The government excludes them because it says their volatile price swings skew its data, but average Americans can't exclude those daily necessities from their budgets.

"The CPI is a joke," Money Morning Chief Investment Strategist Keith Fitz-Gerald said earlier this year. "Every American knows that in reality it's far higher than that based on what they feel in their wallets every day."

Furthermore, the numbers are more often reported as changes from the previous month as opposed to the previous year, which softens their impact. The CPI has risen 3.6% in the past 12 months, for example.

In fact, the annual numbers in several individual categories show why so many middle-class Americans are struggling to make ends meet. The price of gasoline, for example was up 33.6% over last July and fuel oil up 37.2%. The "food at home" category, which is mostly groceries, was up 5.4%, with dairy products up 7.9%.

The PPI is up 7.2% from last July, which means businesses have eaten some price increases rather than pass them on to customers. Going forward, businesses either will have to raise prices further - adding to consumer inflation - or will have to accept lower profits. Both options would be bad for the economy.

Fed Failure
The Fed - which is charged with keeping inflation in check - has not taken such numbers into consideration as it has held interest rates near zero and embarked on "quantitative easing" policies that have flooded the markets with money.

In effect, the Fed is pouring gasoline on a fire that it should be extinguishing.

"Ultra-low interest rates and excess money supply growth are what's been driving inflation," Hutchinson said. "They raise commodity prices, which over time feeds into inflation in general."

The threat of stagflation paints a dark picture of the fate of the U.S. economy in the months and even years ahead.

It's a grim landscape of high unemployment and companies treading water while the Fed declines to reverse course. In such a scenario, Hutchison believes inflation could go beyond 1970s levels.

"Once inflation takes off, there's nothing holding it to the 10% level it peaked at in the late 1970s," Hutchinson said. "Bernanke's "no interest rate hike till 2013' will look very silly as inflation zooms higher."

Source :http://moneymorning.com/2011/08/19/threat-of-stagflation-looms-as-prices-rise-despite-bad-economy/

Money Morning/The Money Map Report

©2011 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in