Issue of the week: The unwelcome return of 'stagflation'

The 1970s are “enjoying something of a nostalgic revival in fashion and music,” said Jeffrey Cane in Portfolio.com. There’s precious little nostalgia for the economic conditions of those dreary years, but they, too, might be making a comeback. Two reports issued last week hinted that 1970s-style “stagflation”—a punishing combination of slow growth and rising food and energy prices—might once again be settling over the economic landscape. Against the backdrop of a slowing economy, both the Producer Price Index and the Consumer Price Index rose sharply last week. The 3.2 percent rise in the PPI, a measure of wholesale inflation, was especially worrisome, as it was the fastest month-to-month increase since 1973, when the first Arab oil embargo pummeled the U.S. economy. The parallel didn’t escape the notice of former Federal Reserve Chairman Alan Greenspan. He warned this week that “the early symptoms” of stagflation were in the air.

Such worries aren’t limited to the U.S., said Scott Stoddard in Investor’s Business Daily. “A wave of ugly inflation data” is sweeping the globe, and few economists “see any relief ahead.” In the “Eurozone”—the 13 European countries whose common currency is the euro—consumer prices have risen at the fastest rate since 2001, while inflation in China has reached an 11-year high. At home and abroad, food and energy costs are the prime culprits. In the U.S., energy costs have soared 21.4 percent above their year-earlier level, and food prices have risen 4.8 percent. Ironically, part of the increase can be traced back to rising living standards around the world. In China and India, “more people are driving cars and eating meat than ever before,” and the competition for resources is driving up prices worldwide.

The global inflation data “could rob the Fed of some maneuvering room,” said James C. Cooper in BusinessWeek. “While growing evidence of a weak economy is likely to bolster the argument for further interest-rate cuts,” the Fed now has to consider whether pumping additional money into the economy will drive prices higher. As part of the Fed’s new communications policy, it’s now emphasizing long-term inflation targets. The Fed hopes that “if people expect low inflation over the long haul, they won’t let transitory jumps” in prices affect their spending decisions. But “the Fed must make policy in the short run.” If it concentrates exclusively on staving off a recession, it could fuel inflationary expectations among consumers and businesses. Stagflation could then become a self-fulfilling prophecy.

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The faltering economy could be just what the eventual Democratic presidential nominee needs to get over the top, said Darrell Delamaide in Martketwatch.com. When public attention is focused on national security, that tends to favor Republicans. But times of economic hardship usually benefit Democrats, who stress such issues as making college and health care more affordable and taxing the rich to help the middle class.

No wonder, then, that Barack Obama, Hillary Clinton, and John Edwards all have been harping on “the worries feeding the middle class’ economic insecurity.” They may not be rooting for stagflation, but nor are they shy about tapping into “middle-class anxieties.”