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January 14, 2008

Is inflation back?

The latest inflation numbers were ugly. Both wholesale and retail inflation were up at rates not seen in many years. Importantly, at the retail level, inflation was up even after stripping out energy and food prices. Are we headed for the worst of all worlds, slower economic growth and faster inflation? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"We have a word for that; we call that 'stagflation.' That's when the economy is growing very slowly and unemployment goes up, but you also have rising prices. The worst stagflationary period we've had was in the late 1970s, when we had both double-digit unemployment and double-digit inflation. Now, economists don't think we're going to get back to that level. The worst-case scenario, I think, would be that we maybe see 5 percent unemployment in 2008 and maybe 4 percent inflation. But that would be the worst combination in several years. Now, the Federal Reserve is watching this. I think this is one reason why they've been fairly timid in lowering interest rates because if you worry about inflation, you don't lower interest rates. You keep interest rates high to try to keep a lid on economic growth. One bright spot in all this news is that the Fed's favorite inflationary measure is not one that you mentioned, it's something called the personal consumption deflator. That has still been very well behaved. That's been hovering around 1.5 to 2 percent, so I think the jury's still out on whether we do have an inflation problem, but it certainly bears watching."

Posted by Dave at January 14, 2008 08:00 AM