Rising Prices, Slowing Growth Hint at Stagflation
By Paulette Miniter | Paulette Miniter Archive | Published: January 3, 2008
LIKE DISCO, STAGFLATION died out with the 1970s. But as oil prices approach $100 a barrel and the economy shows signs of slowing down, whispers of stagflation making a comeback are starting to be heard.
Coined in what was arguably the worst decade for the U.S. economy since the Great Depression, stagflation is a combination of declining economic growth (stagnation) and persistently rising prices (inflation). It's an especially pernicious enemy for monetary policymakers because their usual weapons for fighting economic threats — either raising or lowering interest rates — are somewhat neutralized. In general, cutting rates encourages economic growth by lowering borrowing costs, but it can also stoke inflation by giving consumers and businesses more money to spend. Raising interest rates tamps down inflation by discouraging borrowing and spending but can also slow economic production.
Today, prices are undoubtedly rising and the economy is slowing down after several years of expansion. On Wednesday, oil futures briefly touched $100 a barrel for the first time and closed at their highest level in nominal terms at $99.62. Consumer prices in November increased 0.8%, the largest monthly gain since September 2005, and were up 4.3% year-over-year, boosted by high food and energy costs. Meanwhile, in a sign that industrial production could be faltering, the Institute of Supply Management reported this week that its key index of manufacturing activity fell to its lowest level in nearly five years in December