Saturday, August 12, 2006


I see headlines with wording such as "Economists Contemplate Use of the Dreaded S-word", referring to a worry that we may be headed for a period of stagflation. According to Campbell R. Harvey's Hypertextual Finance Glossary, stagflation is "A period of slow economic growth and high unemployment with rising prices (inflation)." Technically, it doesn't look like we're even close to headed there since unemployment is still rather low, but some people believe inflation is headed much higher and growth is headed much lower.

Typcially, stagflation is associated with very slow growth (say, below 2% or even a recession) and very high inflation (say, above 5%). We aren't even close to being there.

Instead, may be approaching what could be called (by me, at least) a period of mini-stagflation, where growth is somewhat weaker than potential (say, below 2.5%), inflation is modedrately higher than expected (say, above 3%), and employment growth is weak but unemployment isn't yet considered a problem (say, fewer than 150K new jobs created each month or unemployment above 5.5%). We need to be careful to look at annual rates, over several quarters.

The worst we can say for sure at this point is that a mini-stagflation may be emerging. We won't know for sure for another six months, but right now we're actually in okay, but not great shape. Inflation is noteworthy, but not accelerating, jobs are still being created, and 2.5% growth isn't that bad.

You could also say that we are getting a whiff of mini-stagflation since the numbers have leaned in the that direction. The coming six months will give us greater clarity.

-- Jack Krupansky


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