TESS VIGELAND: I don’t know about you, but I HATED the early ’70s. At least I’m sure I would’ve if I’d been old enough to remember them. Long lines at gas stations, hot pants . . . and then there was that one word on every financial expert’s tongue: stagflation. It’s the combo of high inflation combined with a shrinking economy — and it’s coming back in style! Zanny Minton-Beddoes is with The Economist magazine. Zanny, I’ve seen peasant shirts back on the runway. What are we seeing in the economy?
MINTON-BEDDOES: We’re not looking at a return to the 1970s. The term stagflation originated, as you know, from the ’70s, and it’s now synonomous with bell-bottoms and all the other terrible things from that period. But what economists are noticing is that the economy is pretty sluggish, and yet inflation is pretty stubborn. And up until recently, you could find people who worried about inflation. And you could find people who worried about growth. But you tended not to find people who worried about both of them. But now it seems that we really do face the prospect of an economy that’s weak, but one where inflation is stubbornly above the rate that the central bankers are comfortable with.
VIGELAND: What happens to consumers in a time of stagflation? What is the biggest risk for the average Joe?
MINTON-BEDDOES: Well, let’s not call it stagflation. One Wall Street economist has talked about slow-flation.
MINTON-BEDDOES: And I think that’s actually, probably a more accurate statement. What we’re talking about is sluggish, slow growth and stubborn inflation. If inflation is more stubborn than people thought, then you should not expect interest rates to fall as quickly as they would otherwise have done. And if growth is sluggish, well, that bodes badly for equities and so forth. The conclusion is, you should be more defensive than you would have been in the absence of this.
VIGELAND: How much worse could it potentially get, if it gets really bad?
MINTON-BEDDOES: Well, both growth and inflation could worsen substantially. So, on the growth side we could have an economy that falls into recession. And on the inflation side, you could have inflation rising higher than its current kind of 2.5 percent. I think the best indicator of whether inflation is getting out of control is to look at inflation expectations. There are consumer surveys that look at that. There’s the spread of the inflation-protected TIPS [Treasury inflation-protected securities] market, the Treasury market. And if you look at that, and you see that inflation expectations are rising sharply, then I would really start getting worried. On the growth side . . . Well, you know, it’s hard to predict just how weak the economy could become. But I would say that, you know, the mortgage question is really the biggest one. And, you know, so far we’ve had a huge collapse in construction. We’ve now got people nervous about what’s going on in the subprime market. If that expands further, then I would really start worrying about the underlying health of the economy.
VIGELAND: Is there any way that we can avoid that situation?
MINTON-BEDDOES: Yeah. The most likely scenario, I think, is still that we have quite a protracted period of sluggish growth, like we’ve had right now. But that, eventually, the fundamentals of the underlying economy . . . the rest of the economy is still quite strong. The productivity growth is still stronger than it was in those stagflationary days of the 1970s, and that the basic dynamic of the economy is still OK. The risk is, obviously, that things get very weak quite quickly. Or, on the other side, that inflation starts accelerating and then the Fed really has to slam on the brakes, which is kind of a traditional recipe for recession.
VIGELAND: All right. Zanny Minton-Beddoes is the U.S. economics editor for The Economist. Thanks so much for coming in and helping us sort this through.
MINTON-BEDDOES: My pleasure.
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