Commentary: We’re in the midst of moderate stagflation
NASHVILLE, Tenn. (MarketWatch) — The federal government recently reported that consumer prices had risen in November for the fourth straight month, thanks largely to big jumps in the price of gasoline and oil.
Nevertheless, the Federal Reserve and many commentators have dismissed concerns about inflation. Instead, much of the economic mainstream continues to call for massive government spending programs to rescue the economy from the specter of “deflation” or a “liquidity trap.”
But with consumer prices rising for almost a full year, it’s hard to see worrying about deflation as anything but a delusion.
A pattern has developed this year: The Bureau of Labor Statistics issues its report on the Consumer Price Index (CPI) for the previous month, and the headlines blare: “Prices Rise Modestly, But Inflation Outlook Still Tame.” The irony is that for most months, the price rise was not modest — being well above a 2% annualized rate.
All along, one of the key facts to “prove” inflation was still not a problem was the year-over-year decline in consumer prices. In other words, the CPI in a given month was lower than it had been in the same month the previous year.
For example, in October consumer prices were about 0.3% higher than they were in September, but even so they were still about 0.2% lower than they had been back in October 2008. The average reader of the financial press would get the impression that prices are always bouncing around somewhat, but with unemployment so high the trend has been downward. Yet this isn’t true. Consumer prices have been on an upward trend all year.
Although technically accurate, to cite the year-over-year declines in the CPI has been very misleading. What really happened is that CPI fell extraordinarily quickly in the last three months of 2008. But the collapse bottomed out in December 2008, and the CPI has risen in almost every month since then. Looking at just the raw CPI numbers (before the government seasonally adjusts them), consumer prices have risen a cumulative 2.9% this year, and that’s only based on the first 11 months of data.
With the BLS’ December release, the public now realizes that consumer prices rose 1.9% between November 2008 and November 2009. Yet this sudden movement into positive year-over-year territory wasn’t because the price hikes in November were particularly large. Rather, the switch into positive year-over-year inflation is simply due to the fact that the big price drops in late 2008 are moving out of the 12-month rolling window.
There will be another such increment come mid-January, when the BLS has to issue the numbers for December’s prices, when the late 2008 drop in prices will have fully worked its way through the twelve-month look-back. If we assume that CPI increases between November and December at the same average rate seen so far in 2009, the government will report in January that December 2009 CPI was a full 2.9 percent higher than prices from a year earlier. Thus in two short months the public will have snapped from thinking we are still stuck in deflation to realizing that official price measures have been rising at a decent clip for quite some time.
In normal circumstances, an annual inflation reading close to 3% would be no big deal. Yet these are far from ordinary times. The Federal Reserve has literally injected more than a trillion dollars into the financial system since the onset of the crisis. Although some economists have warned of an inflationary time bomb, the general reaction has been calm because of the notion that we’re in a liquidity trap.
The painful lesson of the 1970s was that the economy can experience high unemployment and price inflation at the same time. Once the public realizes that we are already in the midst of moderate stagflation, the process may snowball. At that point, Federal Reserve Chairman Ben Bernanke will find it very difficult to put the inflation genie back in the bottle.
Robert P. Murphy is a senior fellow in business and economic studies at the California-based Pacific Research Institute .