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Stagflation Rears Its Ugly Head

The Consumer Price Index (CPI) climbed by 0.5 percent in July, according to a Labor Department report.  That came after a decrease of 0.2 percent the previous month.  Rising inflation cuts consumers’ buying power.  Average pay, when adjusted for inflation, fell in July and has declined by 1.3 percent in the last year.  Over the last 12 months, prices have gone up 3.6 percent.  Core prices over the last year have risen 1.8 percent — the largest increase since December of 2009. 

“Once again, the consumer was pushed to the wall by rising retail costs,” said Joel Naroff, chief economist at Naroff Economic Advisors.  “It’s bad enough that workers are not getting any pay increases but the surge in retail prices is cutting into spendable income.”  Although many economists and the Federal Reserve expect that higher food and energy prices will prove short lived, that offers little good news to Americans who must find the money to pay for food and gas.  “This is not welcome news for Fed officials who are trying to justify QE3,” First Trust analysts said.

The news also raises the specter of stagflation, a circumstance when the inflation rate is high and the economic growth rate is slow.  Writing for CBS Money Watch, Dan Burrows says that “Prices are growing rapidly but the economy is not.  Sound familiar?  It’s called stagflation — something we haven’t had in three decades — and markets are getting more jittery about its possibility with each passing data point.  A stagnant economy plus inflation equals stagflation, and it could actually be worse for American households this time around, should it come to pass.  Yes, inflation rates of three percent to four percent are nothing compared to the double-digit inflation Americans lived with in the 1970s and early 1980s.  But then households were in much better shape back then because they carried much less debt, be it through mortgages, home equity loans, credit cards or student loans.”

The Hill’s Vicki Needham writes that “The energy index has risen 19 percent over the past year.  Overall, food prices increased 0.4 percent in July, with larger increases in dairy and fruit prices.  The cost of meat, coffee and vegetables all increased.  The core index, excluding volatile food and energy, was up 0.2 percent, slightly below the 0.3 percent increase in each of the previous two months.  Prices are up 3.6 percent from a year ago, the same amount as in May and June.  Core prices are 1.8 percent higher than they were a year earlier, the largest increase in two years, with rent and the rising cost of hotels pushing up housing prices by the most in three years.  Although prices are up, the index of core prices, used by the Federal Reserve to gauge inflation, is within the target range of 1.5 and two percent.  Core consumer inflation is expected to remain between 1.5 and 1.8 percent this year, the Fed has said.  The cost of apparel increased sharply last month, as clothing prices were up 1.2 percent, the third consecutive month of increases.  Clothing costs have increased 3.1 percent during the past 12 months, the largest yearly increase since July 1992.”

With an economy sluggish, and many calling a recession inevitable, the latest CPI number fits with recently released Producer Price Indexes (PPI) which showed prices rising throughout different levels of production.  While recessions are usually deflationary, rising measures of inflation have sparked fears of stagflation.

Surprisingly, the Chicago area was relatively immune to July’s inflationary numbers.  Consumer prices in metropolitan Chicago declined 0.4 percent in July from June as energy prices fell, according to the Labor Department.  With the exception of food and energy, prices were also down 0.4 percent.  Compared with last year, prices rose 3.2 percent and there was a 17.8 percent spike in energy costs.  When food and energy are taken out of the equation, prices rose 1.6 percent compared with last year.  Food prices remained the same as June, but rose 3.5 percent from July 2010.  Energy prices declined one percent from June as gasoline prices dropped 4.2 percent.  Gas prices were 37.3 percent higher than in 2010.  The biggest price declines were in education and communication, down 3.8 percent; clothing was down 2.6 percent; and transportation was down 1.7 percent.  Housing costs rose 0.5 percent.

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