GlobeSt.com has reported multiple warnings about the possibility of stagflation, the specter of economic nightmare from the 1970s.
However, the term is being used differently today than 50 years ago. Technically, stagflation is, or was, a combination of rising inflation, high unemployment, and slow economic growth. These days, the concern has shifted away from high unemployment, leaving only stubborn inflation and slowing economic growth, what RSM chief economist Joe Brusuelas coined as “stagflation-light” — according to a report from Reuters.
The 1970s “may have featured the worst U.S. economic leadership since the Great Depression,” as Howard Schneider wrote for Reuters. The Federal Reserve was making mistakes in data and frameworks. The Ford administration became comical with its “Whip Inflation Now,” or WIP, buttons.
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Many factors undercut the economy at the time. Richard Nixon had recently taken the U.S. off the gold standard and into a period of fiat capital. During an inflationary period, he tried wage and price controls, which did not work. The OPEC nations started an oil embargo against U.S. support for Israel, driving up prices on virtually everything.
This led to such dire times that economist Arthur Okun, mostly known for his work on the relationship between unemployment and gross national product growth, created the so-called misery index. That was the sum of inflation and unemployment in an attempt to quantify the pain inflicted by rising prices and high joblessness.
Conditions today don’t come close to rivaling those in the 1970s. However, what is capturing attention is the continued refusal of inflation to fall faster, even as the Fed is projecting some upward movement of unemployment.
There are signs of disagreement within the central bank, which still expects two quarter-point interest rate cuts by the end of the year. However, some, like Federal Reserve Bank of Atlanta President and CEO Raphael Bostic, point to “a lot of uncertainty” and think that only one round of rate cuts should happen this year.
Currently, the benchmark federal funds rate controlled by the central bank is between 4.25% and 4.50%. If the polled economists were right, two 25 basis point cuts would bring the range down to 3.75% and 4%. A 25-basis-point cut would leave it between 4% to 4.25%.
One could argue that the Fed’s economic projections at its meeting last week were more in keeping with the more cautious approach. Trump’s planned expensive tax cut and tariffs are generating uncertainty, with unemployment and inflation expected to increase slightly.
Even if that isn’t the old definition of stagflation, it could cause its own brand of pain.
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