Oklahoma City, Oklahoma 2022-05-27 12:12:09 –
Washington – Stagflation. It was the horrifying “S word” of the 1970s.
For an American of a certain age, it reminds us of a gas station, a closed factory, and a painfully long line of memories of President Gerald Ford’s very ridiculous “Whipped Inflation Now” button.
Stagflation is the toughest economical pill. High inflation mixes with the weak job market, punishing consumers and causing toxic brewing that confuses economists.
For decades, most economists didn’t even think that such a nasty formula was possible. They have long assumed that inflation would only be high if the economy was strong and the unemployment rate was low.
However, due to the unfortunate confluence of events, economists date back to the disco era and nearly half a century ago, a low-inflation, high-unemployment economy. Few people think that stagflation is visible. But as a long-term threat, it can no longer be dismissed.
This month, Treasury Secretary Janet Yellen recalled the word in a statement to reporters.
“The outlook for the global economy is difficult and uncertain, and rising food and energy prices have had a stagnant effect on curbing production and spending and increasing inflation around the world,” Yelen said. Stated.
On Thursday, the government estimated that the economy shrank at an annual rate of 1.5% from January to March. However, this decline was primarily due to two factors that did not reflect the underlying strength of the economy. It is the widening of the trade gap due to Americans’ desire for foreign products and the slowdown in corporate inventory replenishment after the significant increase in the holiday season.
So far, economists have broadly agreed that the US economy has enough vitality to avoid a recession. But the problems are piled up. Consumer prices have skyrocketed at the fastest pace in decades, due to supply chain bottlenecks and the turmoil of Russia’s war with Ukraine.
The Federal Reserve and other central banks, blinded by intense inflation, are struggling to catch up by aggressively raising interest rates. They want to cool growth enough to curb inflation without causing a recession.
It’s a notorious and difficult task. The widespread concern reflected in the slump in stock prices is that the Fed will ruin it and destroy the economy without knocking out inflation.
This month, former Federal Reserve Chairman Ben Bernanke told The New York Times: So next year or two, there should be periods of low growth, at least a slight increase in unemployment and high inflation. “
And Bernanke summarized his thoughts: “You can call it that stagflation.”
What is stagflation?
There is no formal definition or specific statistical threshold.
Mark Zandi, Chief Economist at Moody’s Analytics, has his own rough guide. He says stagflation will arrive in the United States when the unemployment rate reaches at least 5% and consumer prices soar more than 5% from a year ago. The unemployment rate in the United States is currently only 3.6%.
In the European Union, where unemployment is usually high, Zandy’s thresholds are different. In his view, the unemployment rate of 9% and the year-on-year inflation rate of 4% combine to cause stagflation.
Until about 50 years ago, economists considered stagflation almost impossible. They cut into what is called the Phillips Curve, named after its creator, New Zealand economist AWH “Bill” Phillips (1914-1975). This theory believed that inflation and unemployment would move in opposite directions.
It sounds like common sense. When the economy is weak and many people are absent from work, businesses find it difficult to raise prices. Therefore, inflation should remain low. Similarly, if the economy is hot enough for a company to pass a significant price increase to its customers, the unemployment rate should remain fairly low.
For some reason, the reality is not that simple. It is a supply shock that can put things off. For example, raw material costs will skyrocket, inflation will ignite, and consumers will spend less money to revitalize the economy.
That’s exactly what happened in the 1970s.
Saudi Arabia and other oil-producing countries have imposed oil embargoes on the United States and other countries that supported Israel in the 1973 Yom Kippur War. Oil prices soared and remained high. Living expenses have become affordable for many. The economy has recovered.
Please enter the stagflation. Every year from 1974 to 1982, both inflation and unemployment in the United States exceeded 5%. The combination of the two numbers, which came to be called the “disastrous indicator,” peaked in 1980 at the most disastrous 20.6.
Stagflation, especially chronic high inflation, was a decisive feature of the 1970s. Politicians struggled in vain to attack the problem. President Richard Nixon wasted his appeal on wages and price controls. The Ford administration has issued a “Whip Inflation Now” button. The reaction was mainly contempt.
Has stagflation arrived?
no. So far, the stagflation glass is only half full.
Certainly there is “flation”. Consumer prices in April rose 8.3% year-on-year, slightly below the 41-year highs of the previous month.
Consumer prices are largely due to the unexpected recovery of the economy from the short-term but catastrophic pandemic recession. Factories, ports and freight yards have been overwhelmed to keep up with the unexpected surge in customer orders. The result was delays, shortages and rising prices.
Critics have also blamed President Joe Biden’s $ 1.9 trillion stimulus in March 2021 for overheating the already hot economy. The Ukrainian war exacerbated the situation by disrupting energy and food trade and raising prices.
However, the “stag beetle” has not arrived yet. The country’s job market continues to skyrocket, even though the government reported Thursday that economic production shrank from January to March.
Over the past year, each month, employers have added more than 400,000 solid jobs. The 3.6% unemployment rate is just above the 50-year low. This month, the Fed reported that Americans are in good financial condition. Last fall, nearly eight out of ten adults said they were “OK or living comfortably.” This is the highest percentage since the Fed began asking questions in 2013.
Still, the risks are accumulating. And so are concerns about potential stagflation. Federal Reserve Chair Jerome Powell acknowledged this month that the central bank may not be able to achieve a soft landing and may not be able to avoid a recession. He told American Public Media’s “marketplace” that he was worried about “factors we couldn’t control”: the Ukrainian war, China’s slowdown, and a prolonged pandemic.
At the same time, inflation is reducing the purchasing power of Americans. Prices have risen faster than hourly wages for 13 consecutive months. And the country’s savings rate, which soared in 2020 and 2021 as Americans deposited government bailout checks in banks, fell below pre-pandemic levels.
Europe is even more vulnerable to stagflation. Energy prices have skyrocketed since Russia invaded Ukraine. The unemployment rate in 27 EU countries is already 6.2%.
Why did stagflation disappear so long?
For 40 years, the United States has virtually expelled inflation. In the early 1980s, Federal Reserve Chairman Paul Volcker raised very high interest rates to combat inflation. In 1981, the 30-year mortgage rate quickly approached 19%, causing a recession in 1980 and 1981-82 in a row. Still, Volcker achieved his goal: he managed to get rid of the high-inflationary economy. And it was moving away.
“The Fed has been working hard since stagflation in the late 1970s and early 1980s,” said Zandy, “to bring inflation and inflation expectations closer to our goals.”
Other factors, including the rise of low-cost manufacturing in China and other developing countries, continued to severely limit the prices paid by consumers and businesses.
The United States has endured high unemployment. It reached 10% after the Great Recession of 2007-2009 and 14.7% after the eruption of COVID-19 in 2020. But until last year, inflation was under control. In fact, since 1990, the country has not faced a year of stagflation standards of Zandy’s 5% inflation and 5% unemployment.
Washington AP writer Fatima Hussein contributed to this report.
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