Worry about stagflation, a flashback to ’70s, begins to grow

Worry about stagflation, a flashback to ’70s, begins to grow

WASHINGTON Stagflation. It was the dreaded “S word” of the 1970s.

For Americans of a certain age, it conjures memories of painfully long lines at gas stations, shuttered factories and President Gerald Ford’s much-ridiculed “Whip Inflation Now” buttons.

Stagflation: When high inflation is combined with a weak labor market, it creates a toxic mixture that punishes the consumer and confuses economists.

For decades, economists believed that such a dangerous concoction was impossible. They had long believed that inflation would only rise when there was strong economic activity and low unemployment.

But a sad confluence has economists reaching back to disco and the grim high-inflation, low-unemployment economy nearly a century ago. Stagflation is not something that anyone sees. It is a long-term threat that cannot be ignored.

Last Thursday, Treasury Secretary Janet Yellen spoke out to reporters.

“The global economic outlook is uncertain and challenging. Higher food and energy prices are causing stagflationary consequences, namely depressing output, spending, and increasing inflation around the world .”

On Wednesday, the government reported that the economy contracted at 1.5% annually between January and March. The economy contracted at 1.5% annually between January and March, according to the government. This was due to two factors that don’t reflect its underlying strength: a growing trade gap due to Americans’ appetite for foreign products and a slower pace in the restocking business inventories following a large holiday season buildup.

For now, economists agree that the U.S. economic has enough strength to avoid a recession. But the problems are mounting. Consumer prices are rising at an unprecedented rate due to supply chain disruptions and Russia’s war in Ukraine.

The Federal Reserve and other central bankers are struggling to catch up with raging inflation by aggressively increasing interest rates. They want to slow down growth enough to contain inflation without causing a recession.

It is a difficult task. Shrunken stock prices reflect the widespread fear that the Fed will fail to realize the task and will clog the economy without delivering an inflation-busting blow.

Former Fed Chair Ben Bernanke stated that although inflation is still too high, it is slowly falling. In the next year or so, there should be a period where growth is low, unemployment has risen a little and inflation is high. “

And then Bernanke summed up his thoughts: “You could call that stagflation.”

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WHAT IS STAGFLATION? There is no official definition or statistical threshold.

Mark Zandi is chief economist at Moody’s Analytics. He says that stagflation occurs when the unemployment rate reaches 5% and the consumer prices have risen 5% or more over a year ago. The U.S. unemployment rate now stands at 3.6%.

In Europe, where unemployment is more common, Zandi’s threshold for stagflation is 9% unemployment and 4.4% year-over-year inflation.

Until about 50 years ago, economists viewed stagflation as a near-impossibility. They settled on a concept called the Phillips Curve, named after its creator, A.W.H. “Bill” Phillips (1914-1975) of New Zealand. This theory argued that unemployment and inflation move in opposite directions.

This sounds like common sense. When the economy is weak, many people are out of work and prices drop, businesses have a hard time raising prices. Inflation should be kept low. Also, unemployment should not rise if the economy is hot enough to allow businesses to pass large price increases to their customers.

However, this is not always the case. A supply shock, such as a rise in the price of raw materials, can cause inflation and leave consumers with less money to fuel the economy.

Which is exactly what happened in the 1970s.

Saudi Arabia and other oil-producing countries imposed an oil embargo on the United States and other countries that supported Israel in the 1973 Yom Kippur War. Oil prices rose and remained high. Many people found it more difficult to afford living expenses. The economy crashed.

Enter stagflation. Each year from 1974 through 1982, inflation and unemployment in the United States both topped 5%. The combination of the two figures, which came to be called the “misery index,” peaked at a most miserable 20.6 in 1980.

Stagflation, and especially chronically high inflation, became a defining feature of the 1970s. Political figures struggled in vain to attack the problem. President Richard Nixon tried unsuccessfully to control wages and prices. The Ford administration issued buttons titled “Whip Inflation Now”. The reaction was mostly ridicule.

HAS Stagflation ARRIVED ?

No. The stagflation glass has only half the contents.

There’s “flation” for sure: Consumer prices shot up 8.3% in April from a year earlier, just below a 41-year high set the previous month.

Consumer price are on the rise largely because of the unexpected recovery from the devastating pandemic recession. Unexpected increases in customer orders have caused chaos at factories, ports, and freight yards. This has led to delays, shortages, and higher prices.

Critics also blame President Joe Biden for his $1.9 trillion stimulus plan in March 2021, which overheated an already hot economy. The Ukraine war exacerbated the situation by causing disruption in trade in energy and food, and driving up prices.

But the “stag” has yet to arrive. Even though the government reported on Thursday that the country’s economic output fell from January through March of this year, the nation’s employment market has continued to thrive.

Every month for the past year, employers have added a robust 400,000-plus jobs. At 3.6%, the unemployment rate is just a notch above 50-year lows. This week, the Fed reported that Americans are in solid financial health: Nearly eight in 10 adults said last fall that they were “doing okay or living comfortably” — the highest proportion since the Fed started asking the question in 2013.

But, the risks are increasing. There are also concerns about possible stagflation. Jerome Powell, Fed Chair, acknowledged this month that the central banking might not be able achieve a soft landing or avoid a recession. According to Powell, “Marketplace” reported that he is concerned about “factors we don’t control” such as the Ukraine war, slowdown in China, and the lingering pandemic.

At the same time, inflation has been eroding Americans’ purchasing power: Prices have risen faster than hourly pay for 13 straight months. The nation’s savings rate has dropped below pre-pandemic levels, after it soared in 2020, , and , as Americans banked for government relief checks.

Europe is more vulnerable to stagflation. Since Russia invaded Ukraine, energy prices have risen dramatically. Unemployment in the 27 EU countries is already 6.2%.

WHY WAS STAGFLATION REMOVED FOR SO LONG?! For four decades, the United States has virtually eliminated inflation. In the early 1980s, Fed Chair Paul Volcker had jacked up interest rates so high to fight inflation — 30-year mortgage rates approached a dizzying 19% in 1981 — that he caused back-to-back recessions in 1980 and 1981-82. But Volcker succeeded in his goal. He was able to eradicate high inflation from the economy. It stayed away.

“The Fed has worked hard since the stagflation of the late 1970s and early 1980s,” Zandi said, “to keep inflation and inflation expectations closer to its target,” which is now around 2%. Other factors, such as the rise in low-cost manufacturing from China and other developing nations, helped to keep prices down for consumers and businesses.

The United States has endured periods of high unemployment — it reached 10% after the 2007-2009 Great Recession and 14.7% after COVID-19 erupted of 2020. But inflation was still low until last year. The nation has not faced an inflationary year since 1990.

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AP Writer Fatima Hussein in Washington contributed to this report.

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