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Stagflation fears unfounded?

Kai Ryssdal Jun 21, 2006

KAI RYSSDAL: I’m pretty sure we are allowed to say this word on the radio, but it’s makinga whole lot of economists out there cringe. Stagflation is what I’m talkingabout. It’s an economic bogeyman. Stagnant growth combined with risinginflation. But with gross domestic product growing by 5.3 percent lastquarter, we got to wondering how stagnant the economy really is. So we put ina call to a guy who might know. David Wyss is chief economist at Standard &Poor’s.

DAVID WYSS: Yeah. Stagflation, of course, arose from the late ’70s,early ’80s. That was a period when growth slowed to an average of about twopercent a year. Less than that through most of the late ’70s. The inflationrate was heading up into double-digit range by the end of the 1970s. And theunemployment rate joined it in double digits in the early 1980s. That was theworst economy we’ve seen in the post-World War II era.

RYSSDAL: All right, well, then do a little compare and contrast for me. Ithink we’re pretty far from that today.

WYSS: Today, actually the economy looks better than average. We’reseeing growth slowing down, but we’re looking for about 3 1/2 percent thisyear, maybe 2 1/2 next year. But that’ll probably be the slow year. Theinflation rate is rising, but it’s rising to a little over 2 percent. That’shardly anything to get excited about. And the unemployment rate at 4.6percent is a full percentage point below its historical average. This isreally more like a normal economy. In fact, better than normal economy.Certainly not the very bad economy that we looked in the ’70s and early ’80s.

RYSSDAL: All right. Well, then, give it up for me. What’s anybody worriedabout?

WYSS: Well, I think what everybody is worried about is number one,Could it come back? And number two, Are we doing things that could make itcome back. One argument for that, the Fed needs to tighten now because ifthey don’t, we’ll gradually work ourselves back into that situation of themid-70s.

RYSSDAL: It’s been a tough patch for Wall Street the past six of so weeks.You know, I mean, we’ve gone from everybody saying, “Oh, we’re at thesehighs,” to a very, very tough 10 days or so. Are the problems in the stockmarket that we’ve been seeing a symptom or a cause of everybody talking aboutinflation?

WYSS: Both. They’re a symptom of the fact that the Fed is worried aboutinflation, and therefore looks like they’re going to tighten more than peoplehad expected earlier. But they’re also a cause because people are looking atthe stock market and saying these guys must know something I don’t. In fact,you know, we’re overdue for a correction in the stock market. This is aboutas long as we’ve ever gone without at least a 10 percent pullback in themarket. So it’s time.

RYSSDAL: So how long do you think it’s going to take for all this talk ofstagflation to sort of disappear?

WYSS: I think it’ll disappear when the Federal Reserve clearly stopsraising interest rates. My guess is we’ve got two more rate hikes to go.


WYSS: I think you’ll see one next week, almost certainly. And my guessis we get one more after that that will get us to 5 1/2 percent. I think theFed then will have to reverse course next year.

RYSSDAL: You were actually at the Fed in the 1970s weren’t you, when all thiswas going on?

WYSS: I was at the Fed, yeah, when this was getting started at least. Iwas at the Council of Economic Advisory when we got into the real stagflationperiod.

RYSSDAL: Tough times? A little tense?

WYSS: These were not fun times. This is something we thought that, youknow, Hey, low unemployment would be somewhere around 6 percent. And itwould be nice to get back to 5 percent inflation. We’re nowhere close to thatperiod yet.

RYSSDAL: Times change. David Wyss at Standard & Poor’s in New York. Mr.Wyss, thanks a lot for your time.

WYSS: Thank you, Kai.

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