Monday, March 10, 2008

Stagflation: It's Sure Nothing Like the 1970s, Yet.

There has been a lot of concern lately about inflation, including a WSJ editorial today by Gerald O'Driscoll (former VP of the Dallas Fed) titled "Inflation Alert." There have also been numerous comparisons recently of today's inflationary environment to the inflation and stagflation of the 1970s, including in today's WSJ.

What do the inflation data show? Below are graphs from the St. Louis Fed for five different measures of inflation from 1970-2008, calculated as the annual percent change from the same period in the previous year.

GDP Deflator Inflation:

CPI Inflation: All items
CPI "Core" Inflation: All items less food and energy
CPI Inflation: Food
CPI Inflation: Energy

1. GDP Deflator inflation (top graph) has actually been generally declining for the last two years, and was higher on average in 2004, 2005, 2006 than in 2007.

2. Although CPI (all items) inflation (second graph above) is rising, it's still at or below several peaks in 2005 and 2006, and still doesn't look anything like the 1970s inflationary levels.

3. Likewise, core CPI inflation (third graph above) is below peak levels in 2006, below the entire decade of the 1990s, and doesn't remotely resemble the inflationary levels in the 1970s that were 2 to 5 times higher than today for core CPI.

4. CPI Food inflation (fourth graph above) is certainly high and rising, but still in line with the levels of the 1980s and 1990s, and far below the double-digit levels of the 1970s, and way below the peak of 20% food inflation in 1973, which signaled the significant inflationary pressure at the beginning of the stagflation era. Also, much of today's food "agflation" is probably caused more by distortionary government subsidies of ethanol than by easy monetary policy.

5. CPI energy inflation is also certainly high, but at or below peak energy inflation levels of 2000, 2003, and 2005, and way below the 30-40% peaks in the 1970s.

Bottom Line: If there is any 1970s-like stagflationary pressures in today's economy, it sure isn't showing up in the inflation data. At least not yet.


At 3/10/2008 11:03 AM, Blogger spencer said...

Throw in another chart of unit labor cost. That will really show the difference.

At 3/10/2008 12:17 PM, Anonymous Anonymous said...

Oil just hit 107.55, send those stimulus checks to OPEC and bypass the middle man. This will lead to further cocooning of an over indebted saving less US consumer, as an insolvent banking system is curtailing lending. With home prices imploding, stock prices falling, borrowing cost rising leading to a downward spiral and increasing unemployment. The bond market is screaming deflation.

At 3/10/2008 1:29 PM, Anonymous Machiavelli999 said...

If Wednesday's oil report does not show a huge built up in stockpiles, I think we are all screwed. Because then we will know that supply, demand and price level means nothing to the Arabs who are running these state oil companies.

At 3/10/2008 1:32 PM, Anonymous Fred said...

I lived through the seventies and this ain't the seventies. Though I do note that ABBA is making a comeback through the musical Momma Mia. No bell bottom sightings yet.

"Anonymous", will you please back away from the computer and go outside for a while. Get some fresh air, sunshine, and attitude adjustment.

At 3/10/2008 2:11 PM, Anonymous Anonymous said...

Agree with you, Fred. The inflation we are seeing is not remotely close to the stagflation of the 1970s.

The U.S. economy continues to show remarkable resilience despite problems in the housing and financial sectors.

Keep your shirt on folks, the world is not about to open up and swallow us whole like Persephone.

At 3/10/2008 5:42 PM, Anonymous Anonymous said...

Isn't it a tad premature to talk about stagflation as if it is history?

"We've Only Just Begun" is a little tune recorded early in 1970 by the Carpenters. Ms. Stagflation is humming that tune a little louder each day.

At 3/10/2008 5:48 PM, Anonymous Anonymous said...

Fred said...No bell bottom sightings yet.

Flapping around in bell bottoms

High-waisted, wide-legged jeans make a comeback

At 3/13/2008 7:33 PM, Anonymous John fitness personal Austin TX said...

The 1970's economy was much different hopefully making stagflation unlikely.

Nixon: "We are all Keynesians now". We now know the Phillips curve does not work. Top marginal rates were 72%; add to that bracket creep. Private sector unions and pattern bargaining were a force.

At 5/08/2008 9:37 PM, Anonymous Anonymous said...

You appear to be comparing raw CPI data, but the method for calculating it has changed twice since the 70's, once in 1983 and again in 1998. Both resulted in lowering the rate of inflation. If you use the same methodology as the 70's, inflation is over 11% right now.

At 8/23/2009 10:33 AM, Blogger thruid3 said...

Well, the market has dropped to about 6500 as of last March. Many economists say the Federal Deficit has quadrupled in the past year, China seems to be quietly unloading dollars and stockpiling copper, oil, commodities, and the dollar has taken about a 20 percent hit during just this year alone ! I too lived through the 70's helping my Dad grow soybeans on the family farm. Soybeans went up from around 3 dollars a bushel to over 13 during the inflation years of the late 70s. Look for Gold, commodities, and energy prices to do a repeat of the 70's, or you could just stick your head in the sand and repeat over and over......."Theres no place like home, Theres no place like home, Theres no place like home......


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