Start digging around for those Bee Gees LPs, because the 70’s are back. Consumer prices jumped 0.4% in January. Meanwhile, a report from the Commerce department showed that housing continues to stink, with applications for building permits slumping 3% to their lowest level since 1991.
The uptick in consumer prices and slumping economy has resurrected the specter of stagflation–the economic quagmire of stalled growth accompanied by soaring inflation.
Why does this matter?
Because inflation from sky-rocketing commodity prices and downturn in the business cycle puts policy makers in a classic catch-22. If they raise rates in an attempt to tackle inflation, they risk delivering a crushing blow to an economy that is already gasping for breath. If they lower rates in an attempt to stimulate flagging demand, they risk unleashing a vicious inflationary spiral.
So what will Fed Chairman Helicopter Ben Bernanke do? What he should do is let the economy take its medicine–by going through a normal, painful recession. One of Bernanke’s predecessors, Paul Volcker, ended the first stagflation crisis by saying the heck with the economy and ending runaway inflation. Bernanke should follow Volcker’s example and have the courage to resist further rate cuts.
What “Helicopter Ben” will likely actually do, however, is continue to try to let us have our cake and eat it, too–thus exacerbating the risk that we’ll repeat the 1970s. The United States has no tolerance for pain, and Ben will likely decide that a bit of inflation is preferable to getting excoriated from coast to coast.
For now, comparisons to the 70’s and 80’s are still premature, since inflation still isn’t anywhere near the 13.5% peak it reached in 1981. But with oil prices hovering around $100 a barrel and the CPI and unemployment creeping up above 5%, stagflation may be set to make an unwelcome return.
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