Sunday, February 19, 2012

Data-dump: the return of Stagflation

Given the rousing cheers from the media, the Administration, and pundits on the left for the recent news that unemployment rates appeared to be decreasing (which we already know was based on something of a fantasy), it's perhaps appropriate to discuss the elephant in the room at the Fed: stagflation.

For those unfamiliar with the term, it was coined in England during the 1960's, but quickly appeared in the United States with regard to the economy under Presidents Richard Nixon and Jimmy carter. Basically, it refers to a situation wherein there is both a stagnating economy (recession and continuous high unemployment) and inflation (rising prices for common goods like fuel, food, and clothing). Theoretically--in Keynesian and post-Keynesian world--this shouldn't happen. There shouldn't be any inflation during a recession and when there is heavy inflation occurring, recessions are supposed to be highly unlikely, if not impossible.

Obviously, the 1970's disproved this element of Keynesian theory (for most people, anyway). Still, it is supposed to be rare. In the 1970's, many Keynesian economists argued that stagflation was the result of a highly unusual confluence of circumstances, in particular the OPEC-induced oil crisis, in a period of recession.

Sounds reasonable, in a way. After all, fuel costs impact every sector of the economy. Thus, the increase in oil/gas prices led to inflation, even though the economy was fairly stagnant. Still, the interjection of government spending should theoretically trump such a rise in fuel prices. Theoretically.

Last year, Tyler Durden at Zerohedge warned of the possibility of stagflation, based on a jump of .5% in the CPI (consumer price index) in July of 2011, much higher than expected, that restarted a trend many hoped was over:
Following yesterday's upside surprise in the PPI, it was only logical that CPI would come higher than expected. However, printing at a 0.7% swing M/M, or the highest in years, was not expected. Broad CPI came at 0.5% in July after dropping -0.2% in June, or 3.6% Y/Y. This was far more than consensus which expected 0.2%. Core CPI however was in line with expectations at 0.2%. The reason for the surge? Gas, food and clothes. "The gasoline index rebounded from previous declines and rose sharply in July, accounting for about half of the seasonally adjusted increase in the all items index. The food at home index accelerated in July and also contributed to the increase, as dairy and fruit indexes posted notable increases and five of the six major grocery store food groups rose...The apparel index continued to rise sharply, increasing 1.2 percent in July; it has increased 3.9 percent over the past three months.
Fast forward six months and what do we find? Anthony Mirhaydari sums it up at MSN Money:
This week's' report on inflation shot holes through the Fed's official stance that inflationary pressures are "subdued" and not a big concern. The takeaway is that food and fuel inflation -- gas prices are up 23% off their December lows, something I gave my readers the heads up on in early January -- is beginning to creep into core measures of inflation that the Fed focuses on. Core consumer price inflation jumped 2.3% over last year, the biggest increase since September 2008.  
It isn't a one-month fluke either: On a three-month annualized basis, core CPI was up 2.2%. This is exactly what Federal Reserve Chairman Ben Bernanke doesn't want to see, since it weakens his case for more quantitative easing. Indeed, this week a Fed official called expectations for QE3 later this year a Wall Street "fantasy," as the rationale isn't supported by the facts.
Get that? Already, we're 2.3% higher than last year. And at the same time, the Iranian situation promises to only make matters worse, as oil exports to the UK and France--so far--are cut off, which will certainly tend to lead to higher oil prices on the world market.

But there's more. Mirhaydari also takes a look at copper:

What does copper have to do with anything, you ask? Well, as I've noted before, it turns out that copper prices are--historically--an excellent predictor of recessions: lower copper prices mean a coming recession, higher copper prices mean a rebound (for the short term). Looking at the above chart, what is absolutely clear is that copper prices are going the wrong way over the long term. This means--at best--minimal real growth. At worst, it means protracted recession, if we assume artificial price hikes are associated with rising fuel costs and--here's the kicker--added production costs apart from fuel.

For what even Keynesians now recognize is that stagflation can also be brought on by increases in production costs due to government policy or anticipated government policy. Thus, everything points towards stagflation in the very near future. This doesn't mean some kind of collapse or market correction is necessarily on the horizon. But it suggests that there is still no real recovery. And  there won't be anytime soon. Because of policy.

So, in the immortal words of Short Round, "hang on lady, we're going for a ride!" Or maybe just the opposite: we're going nowhere fast.

Cheers, all.

1 comment:

  1. Ever read The Lord of the Rings?
    Even having seen the movies will do.

    Not elephant, Olipant. Much larger critter, ridden to war by evil peoples from South Harad. Dark complexion, but remember JRR was born to missionaries in North Africa. So it is in context.

    We have Oliphants in this room, room being the space betwixt the present and the upcoming elections. ON THEIR BACKS: Disability.

    The (reported) numbers for people seeking Unemployment Compensation are being held a bit lower by those who have left that particular cue to stand in another, more permanent line. Disability.

    Would you believe mental disease? Evidently, the bureaucrats in charge of assigning benefits do, so your opinion and mine are moot.