"Stagflation" is a strange word. It sounds like a description of a bad bachelor party. Yet, it may be returning to the US economy with a vengeance.
If corporate earnings do indeed slow and the overall economy loses steam because the poor consumer can no longer spend money until he is exhausted, the life will go out of the five-year expansion.
That may not be the extent of it. Oil is still over $90 and wheat prices passed the $10 per bushel barrier. That is a sign that the cost of food is high, and going higher. In China, where inflation is running just below 10%, food prices are moving up closer to 20%.
The world’s supply of food is ample, especially what is being produced in the US. But the need for food is spiking due to demand in emerging countries and the use of agriculture products for alternative energy.
If food and fuel keep moving up into 2008, the economy could easily be hit with flat GDP growth but core inflation rising at 4% to 5%.
The last period of stagflation in the US was 1983. The Fed raised rates to keep down the inflation factor, but that hurt GDP. For over a year, it create a "no win" situation.
Reuters writes that Alan Greenspan recently said "We are beginning to get not stagflation, but the early symptoms of it."
Mr. Greenspan may be a bit slow on the draw. We may already be there.
Douglas A. McIntyre
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