STAGFLATION MAY BE BACK

We are all aware of the definitions of inflation and deflation, price increases and decreases over time; however, there is another 'flation, stagflation, which many college students today are not familiar with, but those who lived through the 1970s wish they could forget. Stagflation is made up of two words, stagnation and inflation. The stagnation refers to a stagnating economy, in other words one in which there is slow or no growth. That is combined with inflation to form stagflation, a period of slow or no growth and rising prices, an unpleasant combination that the United States has been happy to avoid for decades, but one that may be happening again right now.

From The New York Times:

Lately, many people are hearing an echo — faintly perhaps but distinctly audible — of the stagflation of the 1970s.

Even as economic growth sags, oil and gasoline prices are surging to new heights. Gold is on the rise, along with the prices of such basic commodities as wheat and steel. And on Wednesday, with the latest government report on consumer prices, there are signs that overall inflation, after years of only modest increases, may be breaking out of its box.

“They are cutting rates with a bill to be paid later," said John Ryding, chief United States economist at Bear Stearns. “The question is not, will we get inflation, but how much will it cost to stuff the genie back in the bottle. This has the feel of 1970s stagflation.”

Over the last 12 months, consumer prices are up 4.3 percent on average, according to the Labor Department. The core index of consumer price inflation, which excludes food and oil, was 2.5 percent higher in January than a year earlier, significantly above the Fed’s unofficial comfort zone of a 1 to 2 percent underlying inflation rate. That’s a far cry from the double-digit inflation rates that battered the economy at times in the 1970s, but still worrisome.