Stagflation Warning: When You Look At What Happened In The First Half Of The 1970s, The Similarity Between Then And Now Is Frightening
October 13th, 2012
Is the U.S. Stagflation Nightmare on its Way Back?
Stagflation Warning Signs
When you look at what happened in the first half of the 1970s, the similarity between then and now is frightening.
Our economy has stalled, last quarter’s GDP was revised down to 1.25% and many economists expect the U.S. to head into a recession next year. Unemployment has been stuck above 8% for more than three years and has only been kept down by a decline in the labor force.
The Fed likes to argue that inflation has remained low, but it seems that trend is starting to change.
Just look at data from the American Institute for Economic Research (AIER), which “backs out” the big-ticket items that are infrequently purchased by consumers. It concentrates instead on “everyday prices” – the regularly purchased items that matter most to working Americans.
Its Everyday Price Index (EPI) rose 1.8% in August compared to the U.S. Bureau of Labor Statistics Consumer Price Index (CPI) which only rose 0.6% in August. Year-to-date the EPI has increased 4.2%, three times the 1.4% increase in the seasonally-adjusted CPI.
And although the oil embargo currently enacted by Iran is not as catastrophic as OPEC’s 1973 embargo, there are still numerous catalysts that could send oil soaring. Escalating tensions in Iran, overestimated supplies, and increased worldwide demand for oil could send the price above $150 a barrel next year.
What You Should Do Now
In order to avoid stagflation and another lost decade, the Fed needs to stop increasing the monetary supply and examine how previous Fed Chairman Paul Volcker raised interest rates from 1979-83 in order to end stagflation.