Stagflation, Or Just a Good Ol' Recession?

Might there be a little something to worry about in the Federal Reserve's recent let-er-rip attitude toward cutting interest rates? See the latest inflation news from the Wall Street Journal:

U.S. wholesale prices surged in January and core inflation also climbed above expectations, according to more data revealing price pressures amid the economic slowdown.

The producer price index for finished goods rose 1.0% on a seasonally adjusted basis after a 0.3% decrease in December, the Labor Department said Tuesday. Originally, prices in December were estimated down 0.1%.

The core index, which excludes food and energy items, rose 0.4% last month, seasonally adjusted. It rose 0.2% in December.

Wall Street expected smaller price increases…..

In the 12 months ending in January, prices climbed 7.4% on an unadjusted basis. In the 12 months ending in December, prices were up 6.3%. The 7.4% climb is the largest since 7.5% in October 1981.

Analyst Paul Kasriel says it ain't stagflation (although a bunch of people quoted in the New York Times and Wall Street Journal might disagree)--just a natural and predictable start-of-recession phenomenon, with inflation lagging the slowing of GDP growth.

A reason roundtable on the Federal Reserve, from November 2006, featuring, among others, Milton Friedman and Ron Paul.

In possibly not unrelated commentary, see some recent goldblogging from me and Matt Welch.

Comments

[Taktix?]

Bring it on!

Those of us who don't base our financial decisions on the whim of tax rebates and not letting "the terrorists win" will welcome a nice correction on the markets.

(Part of my embrace of capitalism requires not feeling guilty for making decent money.)

[joe]

The wildcard here is that this recession, if it turns into one, is coming at what should be the top of the business cycle, when the recovery from the recession of the early 00s has been picking up steam for a few years. We never got to the point where investment in productive capacity became overheated as pent-up demand slackened after months of people buy-buy-buying.

This would seem to suggest that predictions based on how ordinary recessions work will be unreliable.

[Reinmoose]

2 recessions in the same decade? My goodness, how the bush administration is efficient at getting things done.

[Graphite]

joe, exactly what kind of economics did you study that you're supposed to be able to pick the exact peaks and troughs of business cycles?

[Graphite]

Or, even more incredibly, the peaks and troughs of some kind of Platonic business cycle that is "supposed" to be occurring, but isn't?

[Graphite]

We never got to the point where investment in productive capacity became overheated as pent-up demand slackened after months of people buy-buy-buying.

Exactly what would you say has been taking place in the housing market over the past few years?

[joe]

Graphite,

Who said anything about "picking the exact peaks and troughs?" We know that there was a trough in 2001; that there has been the steady-but-not explosive growth that characterizes the recovery period of the cycle since then; and that the strong, even overheated growth that marks the peak of a cycle hdidn't happen before this downturn occured.

Platonic nothing - I'm talking about how business cycles have historically, reliably played out right here in the Cave.

[joe]

Exactly what would you say has been taking place in the housing market over the past few years?

Precisely - the HOUSING market. Not the economy as a whole. We've had one thing happening in the housing market - explosive bubble growth - which is not seen in the economy as a whole, which has been posting job growth that was just under population growth for a while and then just over population growth for a little while. Ditto with GDP growth - it has been right around population + inflation for a couple years, and only outperformed it a little, recently.

That is characteristic of the early period of a recovery, when the economy is still picking up steam.

[Mo]

Goldilocks, Goldilocks, Goldilocks!

[Mo]

Damn, my parody [/Larry Kudlow] tag disappeared.

[Petunia Wainwright]

Reason sucks

[kinnath]

Stagflation, Nixon, Ford, & Carter. Sweet memories indeed.

[thedifferentphil]

Our recent peak of inflation is 4% annually. Honestly, who really cares? I know that the Libertarian line (for example, Ron Paul) is that inflation is eroding our wealth, but that is only true if you hold your wealth in cash or dollar-denominated savings vehicles, such as savings accounts or bonds. And even then only if the inflation is not anticipated when you accept an interest rate at the time of bond purchase. I can think of a lot of things to be worried about in the economy, but the difference between 2% and 5% inflation is not one of them.

[kinnath]

Let's not forget the 20% misery index (10% inflation and 10% unemployment) under Carter.

[Reinmoose]

thedifferentphil -

sticky wages + fixed incomes

[retired fart]

Our recent peak of inflation is 4% annually. Honestly, who really cares?

Uh, I do.

[retired fart]

Member of the only voting block that scares the shit out of both parties.

[Graphite]

Let's not forget the 20% misery index (10% inflation and 10% unemployment) under Carter.

PHILLUPS KURV!!

[Bhh]

Some insightful person a while back compared the US in the 00s to the Soviet Union in the Brezhnev Era. Let us now queue for kilo of withered cabbage comrades.

[Stereolab]

it's alright 'cos the historical pattern has shown
how the economical cycle tends to revolve.
in a round of decades three stages stand out in a loop.
a slump and war then peel back to square one and back for more

bigger slump and bigger wars and a smaller recovery
huger slump and greater wars and a shallower recovery

you see the recovery always comes 'round again
there's nothing to worry for things will look after themselves
it's alright recovery always comes 'round again
there's nothing to worry if things can only get better

there's only millions that lose their jobs and homes and sometimes accents
there's only millions that die in their bloody wars, it's alright

don't worry. be happy. things will get better naturally.
don't worry. shut up. sit down. go with it and be happy.

[Chris Potter]

I know that the Libertarian line (for example, Ron Paul) is that inflation is eroding our wealth, but that is only true if you hold your wealth in cash or dollar-denominated savings vehicles, such as savings accounts or bonds.

The amount that poor and lower-middle-class people can reasonably expect to put away for a long time isn't going to get a decent interest rate (ie, higher than inflation), and their wages are probably not going to increase to keep up either. So, once again, those evil selfish libertarians turn out to be the underclasses' best friends...

[Pro Libertate]

I'm in a state of malaise.

[Chris Potter]

It's funny, on the NewsHour last week they had a special report on the history of presidential campaigns on inflation, going back to Harry Truman and Dwight Eisenhower, all the way up to Ronald Reagan vs Carter.

Guess which recent candidate they didn't mention?

[joe]

Mondale? Old Bush? Clinton? Dole? Young Bush? Gore? Kerry?

[Taktix?]

Ooo, Ooo, was it Daniel Kingery?

[thedifferentphil]

Reinmoose,
Sticky wages + fixed incomes + rising prices = increased business profits. That really is just a distribution arguement. You can't have rising prices without rising incomes, because the money has to go somewhere. If wages are sticky, then it also might well mean that workers were being overcompensated in the first place, so inflation can actually improve the connection between wages and the marginal productivity of labor. That might make things more "fair."

[Taktix?]

I pay my secretary in sticky wages...

*ducks*

[Reinmoose]

thedifferentphil -
It is in part a distribution argument, yes. Inflation gives more ammo to the "we want to redistribute your wealth" types.

[ObviousMan]

Inflation: good for borrowers; bad for savers

Deflation: good for savers; bad for borrowers

[Mo]

thedifferentphil,
How is that going to happen in a time with a reverse wealth effect in process. Wealth is down, so people aren't drawing from there, in times of economic uncertainty, people tend to pull back on spending. The actual equation is Sticky wages + fixed incomes + rising prices = reduced quantity and spending. Less Applebees spending and more Walmart spending. Wages are sticky due to menu costs.

[Mo]

7% inflation: Bad for Americans, good for Zimbabweans

[joe]

Inflation itself may be "just a distribution issue," but inflation during a time of recession is certainly much, much more than that.

[javier]

Our recent peak of inflation is 4% annually. Honestly, who really cares? I know that the Libertarian line (for example, Ron Paul) is that inflation is eroding our wealth, but that is only true if you hold your wealth in cash or dollar-denominated savings vehicles, such as savings accounts or bonds. And even then only if the inflation is not anticipated when you accept an interest rate at the time of bond purchase. I can think of a lot of things to be worried about in the economy, but the difference between 2% and 5% inflation is not one of them.

I think you have successfully explained why inflation is the major factor in growing wealthy between the rich and poor and eroding of the middle class.

Yes, most of us educated folk hold our wealth in a good store of value like real or financial assets. But most line workers do hold their money in dollars whether it be savings or CD's and I hardly think most take into account 'expected inflation' (keynesian nonsense). Most just try to save a certain percentage of income. Which is then devalued by inflation and purchasing power is redistributed to owners of capital.

[joe]

Interesting, javier, but I'll note that the rich-poor gap grew pretty robustly during the low-inflation 90s and early 00s.

[javier]

growing wealthy between = growing wealth gap between

[Franklin]

The difference between 2% inflation and 5% inflation is not trivial... especially if you're talking about the difference between 2% and 5% using government statistics. Then again, why would anyone use government statistics unless they're trying to mislead you?

Much more reliable data.

Scary music works too. 😉

[kinnath]

I have little faith in any attempt to analyze cost-of-living across a span of more than a few years.

My first VCR cost 2 to 3 weeks salary and was a major purchase. You can get a decent DVD player for about 30 bucks now. I've got 5 TVs, 2 home theater systems, a DVD player, and an old VCR in the house. This is not that unusual for a middle-class, middle-age guy.

My first car (a used '69 Camaro) had about 90K miles when I got it and was on its last legs within another 20K. My Exterra has a 106K now and I fully expect to get another 100K so long I continue to change the oil on schedule. My 200SX had more that 130K and was going strong when I totaled it by hitting two deer on the freeway (great big rodents -- fuck Bambi).

I'm not even sure the basics (food, shelter, engergy) can be adequately compared over decades.

[Mo]

Am I the only one wondering why 1 guy has 5 TVs?

As for not comparing food, shelter and energy, why not? Do you eat power pellets and live in a tree? Are you just post-econ, so therefore inflation doesn't apply in your world?

[kinnath]

Am I the only one wondering why 1 guy has 5 TVs?

Shit doesn't break anymore . .

Used to be you could "upgrade" when the last one died.

[kinnath]

As for not comparing food, shelter and energy, why not? Do you eat power pellets . .

fast food . . same difference

[Robert]

Ugh, this one is not gonna pretty. Taktix, bud, while on one level I do sympathize with your notion of recessions "cleaning out the mess", it ain't gonna be so, uh, clean this time around. The most corrupt and profligate of the bankers and CEO's have their $50 million golden parachutes already built into the contracts-- propped up by Chinese manufacturers and Arab oil sheikhs who are our new owners-- while it's the "little people" on the ground, without financial firewalls, who are gonna get slammed.

In prior US recessions, the USA never had this kind of hourglass economy, at least not since the Gilded Age. Now that we do, in what's likely to be a much worse recession, it's gonna get very ugly.

Lots of issues and I doubt that either liberals or conservatives alone have a good answer.

Though I suspect we could help ourselves by not bankrupting our Treasury on dumb wars (including preparing to start up a new conflict against Serbia and Russia in Kosovo) and spending trillions of dollars on nuclear weapons and $50K + toilet seats at the Pentagon. Just sayin'.

[Robert]

BTW, a whole bunch of my old computer science and networking gearhead friends from college, have been learning German or French (one guy even learning Dutch) at warp speed these days. When you combine a recession with the already dreadful damage from corporate outsourcing, it's ugly for anyone in IT.

So bad that a good few of my old pals are emigrating, chiefly to Germany if they learn enough of the language. It's not all flowers and colors there either, but they still have a growing IT sector.

Plus Germany has done something I suspect a lot of countries will be doing-- linking itself up a lot more with China in particular so as to at least cushion shocks from the overstretched US economy.

So for a big cohort of my old college classmates, my conversations will now be starting with, "Guten Tag."

[Mob]

thedifferentphil ,

Do you think you will be conscious for a few seconds after the blade drops and your head falls in the basket?

I hope so.

[thedifferentphil]

Didn't check in while the mob was gathering. You know, I didn't say that I want big inflation, just that the difference between 2% and 4% is no big deal. It is pretty much a reflection of the market increase in energy costs. We use a lot of energy, which we import. So, our economic productivity just went down. This means either prices go up or wages and profits go down. If we don't allow prices to drift up a bit, and if wages are indeed sticky, then we will end up with serious unemployment.