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My Two Cents


Chris Farrell Jan 31, 2008

Here’s my reaction to the government’s GDP report and the Fed rate cut…

Is another big name from the 1970s attempting a comeback? Stagflation, the worst-of-both-worlds scenario in which weak growth is accompanied by robust inflation, may be on the radar again. It’s enough to conjure memories of President Gerald Ford’s ill-fated campaign to talk down prices through a “Whip Inflation Now” (WIN) campaign. The risk is evident in the latest economic numbers. Indeed, Marc Faber, the widely followed global investment adviser based in Asia believes that “we’re already in stagflation: no real economic growth–or recession–amidst inflation” in his latest Gloom Boom & Doom Report.

Certainly, the economy is teetering on the edge of recession. Government statisticians reported on Jan. 30 that gross domestic product, dragged down by the declining home market, grew at an anemic 0.6% in the final three months of 2007. The 2.2% rate for all of 2007 was the worst performance in five years……

…Yet inflation is also running hot. The GDP report has the prices of goods paid for by consumers during the fourth quarter increasing by 3.8%, up sharply from the 1.8% pace of the previous three months. The cost of living as measured by the more widely followed consumer price index rose by a steep 4.1% last year–its highest rate in 17 years–while in the last quarter of last year the CPI surged by 5.6%. No matter how it’s measured, consumer inflation is well above the Fed’s target range of 1% to 2%…

…. The risk for business, consumers, and investors is the emergence of a different kind of stagflation–call it “stagflation-lite.” It would be defined by higher-than-expected inflation rates (say, a 5.6% increase in the CPI) and lower-than-expected growth rates (like a 0.6% economic expansion).

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