Stagflation under the radar?

[Uncle Festivus]

From Wikipedia -

"Stagflation, a portmanteau of the words stagnation and inflation, is a term in macroeconomics used to describe a period of high price inflation combined with slow output growth, high unemployment, or recession. "Stag" refers to a sluggish economy, while "flation" signifies rapidly rising consumer prices.

Stagflation is a problem because most tools for directing the economy, that is fiscal policy and monetary policy can trade off growth for inflation. Either they slow growth to reduce inflationary pressures, or they allow general increases in price to occur while generating output growth. Stagflation creates a policy bind in which efforts to correct one problem can worsen the other. The dilemma in monetary policy is instructive. The bank can make one of two choices, each with negative outcomes. First, the bank can choose to stimulate the economy and create jobs by increasing the money supply (by purchasing government debt), but this risks boosting the pace of inflation. The other choice is to pursue a tight monetary policy (reducting government debt purchases in order to raise interest rates) to reduce inflation, at the risk of higher unemployment and slower output growth."

So it looks like the rebound today has overshadowed some interesting data the last few days -

________________Previous_________Latest

ISM Services_____59%_____________54.3%
Productivity______3%______________1.6%
Unit Labour Costs__1.7%____________6.6%
Factory Orders____2.6%____________-5.6%

Productivity down, Labor costs up, factory orders down.

Is this anything to be concerned about or just normal fluctuations? To me it looks a bit of a concern, when in conjunction with other sectors eg housing and sub-prime mortgage meltdown.

And from Bloomberg -

http://www.bloomberg.com/apps/news?pid=20601103&sid=a1U0VNlumKVk&refer=news

 

[Uncle Festivus]

WASHINGTON (MarketWatch) - The Fed's dilemma is getting tougher. Core consumer prices increased at the fastest pace in six months during February, even as consumer spending slowed to the weakest in six months, according to government data released Friday.
The Fed's preferred measure of core inflation -- the core personal consumption price index -- rose 0.3% in February, the biggest gain since August, the Commerce Department reported Friday. Core inflation matched economists' expectations.
January's gain was revised from 0.3% to 0.2%, softening the blow to some extent.
On a year-over-year basis, core inflation ticked up to 2.4% from 2.2%, moving further away from the Fed's comfort zone of around 2%. It's the highest since September.
Overall consumer inflation increased 0.4% in February and is up 2.3% in the past year.
If the inflation news weren't bad enough, the report also showed that real (inflation-adjusted) consumer spending growth slowed to 0.2%, the weakest gain since August. Much of the increase was due to higher spending services, especially heating bills.
Consumer spending accounted for almost all the growth in the fourth quarter, but has slowed in the first quarter to about 3% to 3.5% annual pace from 4.2% in the fourth quarter, economists said.
Spending had risen 0.3% in January.
"American consumer spending is due to moderate in the near term as the housing headwinds persist," wrote Sal Guatieri, an economist for BMO Nesbitt Burns, in a research note.
The Fed is thus faced with both accelerating inflation and a slowing economy, a condition that some have called "stagflation."

http://www.marketwatch.com/news/sto...ACB-45F5-A310-0FAE392B63D9}&dist=MostReadHome

 

[Uncle Festivus]

Marc Faber comments

Old violins are playing the last waltz!

If, as I believe, the US economy has already reached the stagflation phase (weak economy but accelerating inflation), rising interest rates come at a very inopportune time for the economy and also for asset markets.


http://www.ameinfo.com/122937.html

 

[Smurf1976]

The housing boom has to be paid for somehow. With so much future income already spent there are really only three options:

1. Inflate away the real value of the debt (inflation) and keep spending.

2. Actually repay the debt at the expense of future consumption (slowing economy).

3. Do neither until we really do go bankrupt and the economy completely falls apart.

There's no free lunch. The meal's been eaten and the bill prepared. It's just that the bill hasn't actually been handed to us yet and we're not sure how much it is and whether to pay credit or cash.

My bet's on option 1. Inflation is what central banks do best - always has been and always will be IMO.

 

[Mousie]

The housing boom has to be paid for somehow. With so much future income already spent there are really only three options:

1. Inflate away the real value of the debt (inflation) and keep spending.

2. Actually repay the debt at the expense of future consumption (slowing economy).

3. Do neither until we really do go bankrupt and the economy completely falls apart.

There's no free lunch. The meal's been eaten and the bill prepared. It's just that the bill hasn't actually been handed to us yet and we're not sure how much it is and whether to pay credit or cash.

My bet's on option 1. Inflation is what central banks do best - always has been and always will be IMO.

Yeah, but till when do they inflate; till their political buddies start screaming?

Oh, actually that wasn't the deal-breaker; it's till they get a run on themselves?

 

[Shane Baker]

Dear Uncle F,

You may find this article interesting regarding inflation and macro viewpoints;

http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2007/IO+May-June+2007.htm

Cheers

Shane

 

[Smurf1976]

Yeah, but till when do they inflate; till their political buddies start screaming?

Oh, actually that wasn't the deal-breaker; it's till they get a run on themselves?

Until the current crop of fiat currencies goes the same way as all fiat currencies (bar the current ones of course) have always gone throughout history.

Their value decreases to that of the energy content of the notes as fuel or its use as insulation or toilet paper. For coins, it decreases to the value of the metal content. In other words, the currency ceases to be useful as a means of exchange (ie money).

Unfortunately now with the plastic notes they're useless as toilet paper and I doubt they'd be too good as thermal insulation in the walls either. They ought to burn but you'll probably kill someone with the fumes. Best use is probably as recycled plastic.

 

[Uncle Festivus]

Morgan Stanley has warned that current jitters on the global credit markets could spread to equity markets.
Stock market corrections - after an increase in the cost of debt - historically follow six months later, suggesting that the current rally on Wall Street and European bourses may be more fragile than it looks.
A rise in the interest rate spread between risky debt and benchmark treasuries knocks away a key support for share prices by raising the cost of money for leveraged buyouts, but there is often a long delay before investors react.

A study by the bank found that credit spreads began to widen on average six months before every stock market correction of 10pc or more over the past 20 years.
The current widening began in February, picking up speed over the past three weeks. If history is any guide, this could point to a global stock market slide as soon as August. Morgan Stanley's model suggests a 14pc fall, or 2,000 points off the Dow.
"This is not the first time that equity markets take their time to react to bad news," said the bank's chief Europe strategist, Teun Draaisma. "The fundamentals have deteriorated. Equities have reached all-time highs despite higher rates, wider spreads, higher oil, Chinese tightening, and a stronger euro.
"There is a widespread belief in continuation of good global growth without inflation. While we are not expecting a recession for another two to three years, we believe chances are high that this belief will be seriously tested soon."

Mr Draaisma added that ever clearer signs of "stagflation" would soon start weighing on confidence.

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/07/23/bcnmorgan123.xml

 

[numbercruncher]

On Wednesday night the world took a fork in the path to the future that will see a return to a world that most people alive have never experienced. A world of hardship, credit squeezes, of long periods of negative growth and mass unemployment. Of recession and of depression, busts countering booms. Of economic cycles that have, since the advent of capitalism, been the norm.

http://www.theage.com.au/news/business/chrysler-crisis-and-the-plunge-into-chaos/2007/07/26/1185339167308.html

 

[Uncle Festivus]

Eurozone stagflation......

Europe's top business lobby has called on the European Central Bank to ease monetary policy, warning that the relentless rise of the euro has reached the "pain threshold".

The cry for relief comes as Germany's finance ministry prepares to downgrade its growth forecast for next year from 2.4pc to 2pc, citing the effects of the strong euro ”” now up more than 7pc this year on a trade-weighted basis.

The ECB is under intense pressure to hold back from raising interest rates above 4pc at its meeting in Vienna today, even though inflation is building up parts of Germany and the eurozone"s M3 money supply is surging at 11.6pc.

Eurozone growth slipped to 0.3pc in the second quarter, even before the summer crisis. Retail sales grew at just 0.1pc in August, while the PPI manufacturing index fell to a 22-month low in September. The slowdown is mostly concentrated in Italy, France, and Spain, where housing booms are fizzling. French house prices dropped 0.9pc in the third quarter.

US Stagflation.......

“We’re beginning to see the extraordinary period of disinflation and economic growth coming to a halt,” Mr Greenspan told a business audience in London on October 2nd. “We now have to be very sensitive to the fact that inflationary pressures could well get out of hand. The trade-off between inflation and growth had become more negative,” Greenspan warned.

 

[Uncle Festivus]

http://www.marketwatch.com/news/sto...x?guid={16BEBA80-3561-4E97-B3BF-DE3A3ABE908C}

The weak jobs report puts more pressure on the Federal Reserve to act aggressively to prevent a recession. Earlier in the week, the prescient Institute for Supply Management manufacturing index fell below the break-even 50% mark, dropping to a nearly four-year low.

Ahead of the report, the Fed was expected to cut its overnight lending rate by a quarter- percentage point later this month to further stimulate the economy, which has slowed significantly with the collapse of the housing market and turmoil in the credit markets. The surge in unemployment could encourage the Fed to cut rates by a half-point.

"The risk stemming from this is that consumers who face debt constraints may not see income growth as strong in coming months," wrote Stephen Gallagher, U.S. economist for Societe Generale. For the Federal Reserve, however, the need to continue offering support to the markets and the economy only grows.

However, the Fed's hands are tied somewhat by worries about inflation, and the jobs report added to those concerns. Average hourly earnings rose 7 cents, or 0.4%, in December, more than the 0.2% gain expected. Earnings have increased 3.7% in the past year.

 

[MS+Tradesim]

"How does one invest for inflation and deflation?"

http://globaleconomicanalysis.blogspot.com/2007/12/how-does-one-invest-for-inflation-and.html

 

[numbercruncher]

Our American cousins are being literlly shafted by their Fed, Rising Inflation, yet falling interest rates to protect asset prices.

Our RBA better not choose the same path, they should stick to the mandate, keep inflation 2 to 3pc. Which in realty "should" lead to many more rates rises


I read a good piece of advice the other day , " Never bet against the Fed "

ie/ what they do do and what they should do can be very different things.

 

[Uncle Festivus]

The Wall Street Journal: The US faces stagflation as the Fed cut its forecast for growth by 0.5 per cent on Wednesday and it emerged that consumer prices had risen 4.3 per cent over 12 months.

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Federal Reserve policymakers have cut their forecasts for growth this year but marked up their estimates for inflation, the central bank revealed yesterday.
The new Fed forecasts came as data showed prices rose at an unexpectedly rapid pace in January, raising fears that the US was experiencing at least a temporary bout of stagflation.

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In one of those odd time warps in history inflation and a stagnant economy are coming together. Inflation is growing primarily because of the high price of oil and grain. The GDP is barely moving because of a credit market crunch and home prices which are in a flat spin downward.

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South Korean technology shares closed lower on Wednesday, ending a four-day winning streak, as investors struggled with growing worries that the global economy may slip into a stagflation, or slower growth with higher prices, after oil prices surged above 100 US dollars for the first time.

--------------------
Gold rallied to a fresh all-time high this morning, supported by fears over rising inflation after stronger-than-expected US CPI data yesterday and amid record high oil prices.

--------------------

 

[Uncle Festivus]

The head of the International Monetary Fund has warned that the world economy is trapped between "fire and ice" - the threat of slumping growth and of rising inflation.

Opening the IMF's spring meetings, Dominique Strauss-Kahn told ministers coming to Washington that there was only limited time to repair the financial system after the worst crisis since the Great Depression.

Speaking with oil prices at record highs, he declared that "inflation may be back" and warned the relentless rise of food prices would hit efforts to reduce poverty in Africa and Asia.
In a final blow to the so-called "Goldilocks theory" that developing nations' growth will help keep the world economy supported in the coming months, he debunked the idea that rich and poorer countries could "decouple".

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/04/11/cnimf111.xml&CMP=ILC-mostviewedbox

 

[Uncle Festivus]

Super stagflation here we come?

LONDON -- British producer prices in April climbed at their fastest annual pace since records began in 1986, setting the stage for the Bank of England's closely watched inflation report due Wednesday.
The U.K. central bank is expected to warn of speeding inflation even as it revises down its economic-growth forecasts for this year and 2009. Such a combination would support the contentions of many economists that Britain is heading into a period of slowing growth and high inflation.

Pakistan's inflation accelerated at the fastest pace in at least 25 years in April because of surging food and fuel prices, straining a six-week-old coalition government already on the brink of collapse. Consumer prices jumped 17.21 percent from a year earlier after gaining 14.1 percent in March, the Federal Bureau of Statistics said in a statement in Islamabad today.

India joins China in trying to cool inflation without hampering growth in the world's two fastest-growing major economies. Vice Premier Wang Qishan said today China will maintain a tight monetary policy to cool prices after producer- price inflation accelerated at the fastest pace in three years.

 

[wayneL]

Super stagflation here we come?

UK CPI has just exceeded the target range as well. Merv the Swerve has to write another letter now.

http://business.timesonline.co.uk/tol/business/economics/article3922131.ece

 

[Uncle Festivus]

UK CPI has just exceeded the target range as well. Merv the Swerve has to write another letter now.

http://business.timesonline.co.uk/tol/business/economics/article3922131.ece

Dear Chancellor,
I have nothing to offer but blood, toil, tears and sweat. Oh, and a gonad, as I lost the last bet I had (hey, I thought the credit crisis was over)
Yours,
Mervy

 

[acouch]

interesting read
ac

http://www.bloomberg.com/apps/news?pid=20601109&sid=asolOLN8ySF4&refer=home

 

[Uncle Festivus]

A bit closer to home....

Inflation is rising at its swiftest pace on record, according to a survey on the eve of the Reserve Bank of Australia's (REA) next interest rate meeting.
The TD Securities-Melbourne Institute monthly inflation gauge showed headline inflation climbed 4.5 per cent in the year to May, after increasing by 0.3 per cent last month. This was the fastest annual increase in the more than 5 1/2 years since the survey began.
“It also marks the fourth month where year ended inflation has been above four per cent, having accelerated from a recent low of 2.6 per cent in May and June 2007,” it said.

Manufacturing activity in Australia slowed in May as production and new orders were dampened by higher interest rates and easing global conditions, a private survey showed on Monday.

An unexpected fall in retail sales reflects a slowing in domestic demand and eases pressure on the Reserve Bank of Australia (RBA) to lift interest rates in the short term, economists say.
Australian retail trade at current prices fe11 0.2 per cent in April to a seasonally adjusted $20.07 billion, from a downwardly revised $20.103 billion in March, the Australian Bureau of statistics (ABS) said today. Economists' had forecast a rise of 0.2 per cent in the month.
Nomura Australia senior economist Tom Kenny said the data was the latest to show that the economy was slowing.