Stagflation. It was the dreaded “S word” of the 1970s.
For Americans of a certain age, it conjures memories of painfully long lines at gas stations, shuttered factories and President Gerald Ford’s much-ridiculed “Whip Inflation Now” buttons.
Stagflation is the bitterest of economic pills: High inflation mixes with a weak job market to cause a toxic brew that punishes consumers and befuddles economists.
For decades, most economists didn’t think such a nasty concoction was even possible. They’d long assumed that inflation would run high only when the economy was strong and unemployment low.
But an unhappy confluence of events has economists reaching back to the days of disco and the bleak high-inflation, high-unemployment economy of nearly a half century ago. Few think stagflation is in sight. But as a longer-term threat, it can no longer be dismissed.
This week, the World Bank raised the specter of stagflation in sharply downgrading its outlook for the global economy.
“The world economy is again in danger,” the anti-poverty agency warned. “This time, it is facing high inflation and slow growth at the same time. … It’s a phenomenon — stagflation — that the world has not seen since the 1970s.’’
The U.S. government estimates that the economy shrank at a 1.5% annual rate from January through March. But the drop was due mostly to two factors that don›t reflect the economy›s underlying strength: A rising trade gap caused by Americans› appetite for foreign products and a slowdown in the restocking of businesses inventories after a big holiday season buildup.
For now, economists broadly agree that the U.S. economy has enough oomph to avoid a recession. But the problems are piling up. Supply chain bottlenecks and disruptions from Russia’s war against Ukraine have sent consumer prices surging at their fastest pace in decades.
The Federal Reserve and other central banks, blindsided by raging inflation, are scrambling to catch up by aggressively raising interest rates. They hope to cool growth enough to tame inflation without causing a recession.
It’s a notoriously difficult task. The widespread fear, reflected in shrunken stock prices, is that the Fed will end up botching it and will clobber the economy without delivering a knockout blow to inflation.
Former Fed Chair Ben Bernanke last month told The New York Times that “inflation’s still too high but coming down. So there should be a period in the next year or two where growth is low, unemployment is at least up a little bit and inflation is still high.”
And then Bernanke summed up his thoughts: “You could call that stagflation.”
There’s no formal definition or specific statistical threshold.
Mark Zandi, chief economist at Moody’s Analytics, has his own rough guide: Stagflation arrives in the United States, he says, when the unemployment rate reaches at least 5% and consumer prices have surged 5% or more from a year earlier. The U.S. unemployment rate is now just 3.6%.
In the European Union, where joblessness typically runs higher, Zandi’s threshold is different: 9% unemployment and 4% year-over-year inflation, in his view, would combine to cause stagflation.
Until about 50 years ago, economists viewed stagflation as a near-impossibility. They hewed to something called the Phillips Curve – this theory held that inflation and unemployment move in opposite directions.
It sounds like common sense: When the economy is weak and lots of people are out of work, businesses find it hard to raise prices. So inflation should stay low. Likewise, when the economy is hot enough for businesses to pass along big price hikes to their customers, unemployment should stay fairly low.
Somehow, reality hasn’t proved so straightforward. What can throw things off is a supply shock — say, a surge in the cost of raw materials that ignites inflation and leaves consumers with less money to spend to fuel the economy.
Paul Wiseman, MDT/AP Economics Writer