Market Analysis

Stagflation and Lava Lamps


Stagflation. Recession. High gas prices. Sly and the Family Stone just headlined in Vegas. These headlines are making us feel woozily anachronistic. Were the 1970s that great we must relive them?

Stagflation is invoked pretty much anytime we see higher gasoline prices coupled with fears of slow growth and increasing inflation. (Note: We said fears of slow growth and increasing inflation. Big difference between the fear and the manifestation.) The word is a fear monger's favorite—it nicely threatens a repeat of 1970s-style economic misery in three terrifying syllables. Be wary anytime you see it—recall the punditocracy uniformly warned us of stagflation during the summer of 2005, and nothing of the sort materialized.

Perhaps this is not a failure of economic forecasting. Perhaps this is a simple misunderstanding of some basic economic concepts. Let's review.

Managers Target Stagflation as Economy Slows
By Murray Coleman, MarketWatch

Staglation was a term coined in the late 1970s to describe runaway inflation and stagnant economic growth. Despite what you read, inflation is and has been low and contained. Folks sometimes gripe because the costs of certain things they buy—health insurance and college educations, for example—go up. But people rarely note when costs of other things—electronics, clothing, shoes—drop. A wise man once said inflation is always and everywhere a monetary phenomenon. Inflation is decidedly not an icky feeling about paying more for certain things.

Is inflation a concern right now? How do you tell? By looking at the market's expectation for the cost of money—the rate on the long bond. Currently at about 4.73%, the market's telling you it doesn't expect runaway inflation. You shouldn't either.

But what about growth? Is it slowing? Are we facing a recession?

Most Americans See Recession in the Next 12 Months
By Matthew Benjamin, Bloomberg

Says here, 6 in 10 Americans predict a looming recession. Sounds pretty bad. Is this credible? Sometimes, we find polls are more about the participants' emotional states rather than facts. Like inflation, recession isn't a "feeling." People can "feel" bad when the economy is cooking along healthily—like right now! The U.S. economy is expected to grow 2.2% this year. It's not blistering growth, but it's not a recession. For the record, a recession is usually marked by negative GDP growth—2.2% is not negative.

Note: 57% of those polled disapprove of Bush's handling of the economy. Not surprising, since Mr. Popularity could cure cancer and most everyone would demand a congressional inquiry into why he didn't do it last year. And what about the poor, unemployed oncologists? But here's the headscratcher—57% also say the economy is doing well. Don't try figuring it out, just ignore the whole thing.

Inflation isn't a worry, and our economy is growing just fine. But what about gas prices? Surely, higher gas prices signal something sinister.

Gasoline, Oil Prices Jump after Steep Decline in US Inventory
By Associated Press, Boston Globe

Maybe not. Demand for gasoline remains high because our economy is growing (not stagflating) and we were surprised by weak supply. Less supply. More demand. Higher prices.

More popular investing concerns—debunked with simple skepticism. Question everything.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.