Economic woes raise fear of 1970s rerun
Stagflation may be back, but few economists think it will rise to the degree of a generation ago.
The echoes seem ominous: a sagging economy, rising inflation, a record price for gold, and plunging stock prices. Could a return to 1970s-style stagflation be just around the corner?Skip to next paragraph
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That dreaded blend of economic stagnation and persistent rising prices is suddenly a topic of concern.
The word stagflation cropped up 562 times in major newspapers and wire services in February, compared with 12 times in the same month last year. Federal Reserve Chairman Ben Bernanke was asked about the danger last week on Capitol Hill. Democrats and Republicans alike peppered him with questions about soaring consumer prices, a sign that their constituents would prefer not to watch that 1970s show all over again.
Economists generally say a return of full-fledged stagflation is unlikely today. But what's already here is bad enough. The economy may have already entered a recession, and at the same time consumers face rising costs for everything from sandwiches to student loans.
"We're not going to see a replay of the 1970s in terms of the actual magnitudes" of unemployment and inflation, predicts James Hamilton, an economist at the University of California, San Diego. But the United States could see a period where "inflation goes up at the same time that real gross domestic product and employment stagnate."
One informal gauge of stagflation, the so-called "misery index," represents the sum of the unemployment rate and change in consumer prices over the past 12 months. Now in the 9 percent range, the index stands at less than half the peak it reached in 1974.
Still, with inflation up more than 4 percent and a jobless rate at 5 percent, the index in December hit a year-end level not seen since 1993, when the economy was struggling to find its footing after a recession.
This has affected the financial mood. Heightened worry is showing up in consumer confidence indexes, and on Friday the US stock market took a big dive.
The Federal Reserve is trying to guide the economy through this rough patch, but for now, it is in a bind.
The central bank is cutting interest rates to stimulate activity by banks, consumers, and businesses. But the easing of monetary policy runs the risk of allowing inflation to run hotter than the Fed likes.
The Fed acknowledges that the key factor here is expectations. If everyone believes that the Fed will eventually keep inflation in check, its strategy should work. "There's no way the modern Federal Reserve would chase inflation up into the double digits," as in the 1970s, Mr. Hamilton says. "They made that mistake once, and they won't make it again."
Still, it's clear that the Fed's credibility is on the line.
Economic woes defined
Deflation – A fall in the general price of goods and services. This problem, seen during the Great Depression, hurts economic growth as consumers wait for prices to fall. By contrast, "disinflation" is a benign reduction in the inflation rate.
Inflation – A rise in the general price of goods and services. When out of control, it constrains saving and investment in the economy. The rate of inflation is most often measured by changes in the Labor Department's consumer price index.
Recession – A sharp contraction in economic activity and employment. A common but informal measure is two consecutive quarters with a decline of national output. A recession is officially declared by a committee of the National Bureau of Economic Research in Boston – this occurs after the fact when final data have arrived and been analyzed.
Stagflation – A combination of stagnation (manifested as significant unemployment and slow or negative economic growth) and entrenched inflation – a phenomenon that characterized the 1970s in America.
Compiled by John Aubrey and Mark Trumbull