With asset prices, sentiment, employment and housing values dropping or stabilizing at low levels, why is it that much of the fear is still centered around the spectre of inflation? Perhaps it is really stagflation, brought about by a resumption of climbing energy prices and a continuation of the jobless recovery, that we should truly fear.
Stagflation, of which there is mercifully no evidence right now, could be the kill shot that ultimately drops this demi-corpse of an economy to the ground. Looking at the uptick in energy prices this week, I am reminded of all the stuff I’ve read about stagflation and the 1970’s. And even though the 70’s gave birth to Star Wars, Paul McCartney’s work with Wings and that Farah Fawcett poster (you know the one), we probably don’t want to repeat that stagflationary decade if we can help it.
To be clear, many inflationistas are only calling for inflation based on their read of what central banks will do to counter deflation. Many are predicting Quantitative Easing Part II and perhaps the White House’s $30 something billion Unemployment Relief hail mary is the first sign of it.
If you believe, as they do, that the pendulum always swings too far in both directions, then you may want to have a look at the above chart, 30 years of data on what CPI inflation does to GDP. Pay particular attention to the 1970’s, as high energy and other prices sent the economy off a cliff until they were brought under control by a gladiator named Paul Volcker.
The message is to be watchful of energy prices. If there is one thing American businesses and consumers don’t need right now, its a return to 2007-2008 prices at the pump.
OK, I know you were expecting it when you read the post title… “HELLO, WISCONSIN!”