Stagflation Hits Wall Street Journal Front Page

As we all know, nothing is true until it hits CNBC or the Wall Street Journal. Even if they are 6-12 months late to a story. We've been talking about inflation and then stagflation since early last fall [Stagflation - the New Sexy Word], but now that the talking heads have gotten a whiff of it, the geniuses on the Street now give it credence ;) Hundreds of thousands of MBAs that cannot think for themselves, but once a trusted source brings it up, hey we better worry about it. If you waited for them to come around to the agriculture boom you missed well over a year of easy money [It Finally Matters - Wall Street Journal Print Edition Front Page: Heartland Sees Boom with Grains in Demand]

One of my economic calls that I am most proud of is my "World of Shortages". It has been assumed (and still is within the hallowed halls of the Fed judging by their minutes) that when the US economy slows, inflation will slow. This is a 1980s, or 1990s view and very pro-American; ignoring the realties of the globe. And I've argued for a long time, very wrong. If you search on shortages in this blog you will see 100s of entries about it. That's why big honchos from major firms appearing on CNBC are scratching their heads, unclear why commodities continue to run in the face of "US and Western Europe slowdown". And why the path the Fed is taking us down is ever so corrosive to the common person on Main Street. We are exaggerating inflation, and hurting already struggling people just so we can bail out those in the upper 1%. Par for the course but it is a sad statement. I've said before, the same folks criticizing Uncle Ben for not cutting rates fast enough will in 2 years come back to this era and say he cut rates TOO FAR and STOKED inflation. He is in a catch 22 - this sort of inflation is to some degree beyond him. But by creating easy money he is punctuating the rabid speculation in commodities as this easy money is being thrown into these relatively small markets, chasing prices ever higher - even higher than they would be under normal supply/demand curve. And last, remember what I've been repeating since last fall [Sept 11: Chinese Inflation Highest in 11 Years - Why Do You Care?] - China will now begin exporting inflation - this is a HUGE difference to what has been happening the past decade+ when they kept a lid on price increases.

What is very different this time, is unlike the 70s when wages ramped up as workers demanded more pay to compensate for inflation is I am not sure that is really going to happen this year. Not when you can threaten to ship most jobs to another country. So the type of workers whose jobs are not anchored to a local area, will be stuck in a tough spot. Faced with rising inflation and inability to be compensated over the normal 3% yearly increases.

But anyhow, the WSJ says stagflation is now an issue, so therefore I suppose now it "matters" to the armies of MBAs running this country's finances. Keep in mind when you read these statistics in this story, they are all poppycock. CPI is probably counting 1/3rd of true inflation.

• The U.S. faces an unwelcome combination of looming recession and persistent inflation that is reviving angst about stagflation, a condition not seen since the 1970s.
• Inflation is rising. Yesterday the Labor Department said consumer prices in the U.S. jumped 0.4% in January and are up 4.3% over the past 12 months, near a 16-year high. Even stripping out sharply rising food and energy costs, prices rose 0.3% in January, driven by education, medical care, clothing and hotels. They are up by 2.5% from the previous year, a 10-month high.
• A simultaneous rise in unemployment and inflation poses a dilemma for Fed Chairman Ben Bernanke. When the Fed wants to fight unemployment, it lowers interest rates. When it wants to damp inflation, it raises them. It's impossible to do both at the same time.
  
• Stagflation, a term coined in the United Kingdom in 1965, defined the years from 1970 to 1981 in the U.S. Inflation rose to almost 15%. The economy went through three recessions. Unemployment reached 9%. Fed Chairman Paul Volcker finally conquered inflation, but only by dramatically boosting interest rates, causing a severe recession in 1981-82.
• As in the 1970s, surging commodity prices are leading the way. Crude oil rose to $100.74 a barrel yesterday, a new nominal high and close to its 1980 inflation-adjusted high. Wheat prices have hit a record. And, as in the 1970s, the rate at which the U.S. economy can grow without generating inflation has fallen, because of slower growth in both the labor force and in productivity, or output per hour of work.
• The inflation picture makes steep rate cuts a riskier way to rescue the economy than when former Fed Chairman Alan Greenspan delivered them in 2001. Stephen Cecchetti, an economist at Brandeis University, said the Fed is now torn between its dual responsibilities of keeping unemployment down and prices stable. "The primary objective has to be to shore up the financial markets" to protect the economy, he said. "Then, once you're finished, come back and start worrying about inflation."
• The declining dollar, while boosting U.S. exports, is adding to inflation pressure, as goods priced in foreign currencies become relatively more expensive. Prices for imports from China jumped 0.8% in January, the largest monthly increase since the Labor Department began reporting the data in 2003.