Despite massive evidence that both recession and inflation - "stagflation" - are now present, Ben Bernanke tried to assure Congress last week that stagflation is not a problem. On Thursday, Bernanke said, "I don't anticipate stagflation. I do not think we are anywhere near the situation that prevailed in the 1970s." Well, we may not have the runaway double-digit inflation of the 1970s, but we have rising inflation combined with slow economic growth. In fact, things are likely to get worse before they get better, so I am amazed that Bernanke is in denial about stagflation. Let me give you the evidence that stagflation, namely rising inflation and slowing economic growth, is now with us.
(1) One half of stagflation is rising inflation. On Tuesday, the Labor Department reported that the Producer Price Index (PPI) rose 1% in January (a 12% annual rate), with food prices up 1.7%, the biggest one-month increase since October, 2004. Energy prices were also on the rampage and rose 1.5% in January, with gasoline prices at the pump rising at even a faster pace of 2.9% (a 41% annual rate). If you live in the Northeast, you were likely not a happy camper, since home heating oil prices rose 8.5% in January. Excluding food and energy, the core PPI rose 0.4%, led by higher drug prices, which rose 1.5%. Overall, the PPI is up 7.4% in the past 12 months, the fastest rate since 1981!
(2) The other half of stagflation is slow economic growth. On Thursday, the Commerce Department reported the revised fourth quarter GDP, showing that economic growth decelerated to the slowest pace in five years, to only 0.6%. This GDP revision was disappointing since many economists were expecting an upward revision, due to robust U.S. exports, which rose 4.8% after accelerating 19.1% in the third quarter. But the export number was likely distorted by seasonal adjustments. In summary, if you exclude exports and government spending, many components of the economy are now in retreat. Another piece of evidence that the economy has slipped into a recession is that on Wednesday, the Commerce Department reported that demand for durable goods declined 5.3% in January, due largely to slow business spending. Orders for commercial planes decreased 30.5%, while military aircraft orders fell 32.6%. Hardly any orders rose - a clear indication of a rapid deceleration of the economy.
A possible ray of hope in the fourth-quarter GDP report is that inventories subtracted a whopping 1.5% from GDP growth, so if cautious businesses get around to rebuilding their inventories, then maybe GDP growth will eventually improve. But the bad news is that consumer and business spending is fizzling in 2008, which is why I expect negative GDP growth to be announced soon.
