My personal thoughts on stagflation…

Were currently in a trying economic environment of high inflation, high unemployment and, slow economic growth.  As economists and politicians continue to debate on which monetary and fiscal policies to initiate, much cognition can be directed towards the refuting ideal of Stagflation.  As stagflation via the simple economic definition is defined as an economic period of high unemployment, high inflation, and slow economic growth. For it exacerbates recessions, and increases the likelihood of its stay in the short and intermediate term. Now the question is, “Are we currently in a period of stagflation?” 

  

The intriguing concept is the fact that stagflation is unlikely ever spoken, as the term has been kept hidden from most of the media and government news channel, sources and discussions.   Jeffrey Sica, chief investment officer of Morristown, N.J. based investment firm SICA Wealth Management stated in an interview with Money.com, “I think it’s probably the biggest unspoken concern of those of us that consider ourselves cautious or bearish as stagflation is a real possibility that is not disused much”.

From a bearish perspective, the slowing economy along with a weaker dollar and higher commodity costs support the stagflation argument.  As inflation along with the support of a stagnate economy induce slow economic growth.  If we take a look at the GDP growth rate, which is a broadcast indicator of the growth of our economy, the current GDP is declining and most economic analysts have been lowering their growth forecasts with a belief that the economy will not reach levels above 2% at the end of the year. 

The recently broadcasted figures for the 4th quarter of 2011 and 2012 put the estimate at 5.3% which was much lower than analysts and the market expected.  The market expected quarterly figures to reflect the maturing decline, but 5.3% was way lower than the market expected. The low Q-4 data  declined GDP growth for the entire ’11-’12  to 6.5%, which is about 200 bps lower than March 2011 figure of 8.4%.   

Given the downward sloping trajectory of the following GDP figures, we can conclude that one of the first parameters of stagflation has been achieved.  As GDP growth computed on a year on year analysis (9.2%, 8%, 6.7%, 6.1% and 5.3%)  has been declining every consecutive quarter. This simple directional movement seems to support  the argument that the economy is growing slowly.      (http://articles.economictimes.indiatimes.com/2012-06-13/news/32215461_1_gdp-growth-stagflation-headline-inflation) .   

In addition, it is now time to speak about the greenbacks worst enemy, inflation.  If we take a look at the fact that prices are increasing all over the country, we can conclude that prices on all goods and services are increasing.   The following two Consumer Price Index charts below show estimates and figures for inflation as of June 14th, 2012.  They were comprised by using the same inflation metric  techniques and calculations used in 1990.  The Consumer Price Index on the Alternative Data Series reflects the CPI as if it were calculated using the same inflation techniques used in 1980.  

In simple terms, techniques used by the government to calculate and report CPI,  have depressed inflation reporting, changing the methodologies and concepts of the CPI away from being a metric of the cost of living needed to carry on  a constant standard of living (http://www.shadowstats.com/alternate_data/inflation-charts).

The following two charts were retrieved from the Shadow Government Statistics website on June 14th 2012. (http://www.shadowstats.com/alternate_data/inflation-charts).

 
 

As you can tell, both Consumer Inflation charts show different variances, as the Shadow Government Statistics index takes into account the Real adjusted figures for inflation and help support the indicator that inflation is currently still in a long term uptrend.  It is well comprehended that the CPI grossly under calculates the real increase in the cost of living.  If you were to abolish all the biases and manipulation that the government uses in its inflation calculation we can further see that the inflation rate is about 7%  (http://www.foxbusiness.com/economy/2012/06/08/ready-or-not-stagflation-is-here/) .

In addition, if we take a look at the recent April 2012 Figures for the Wholesale Price Index and the Consumer Price Index. We can also support the argument that inflation is rising. Hence, supporting the second condition of stagflation. As the Wholesale Price Index (on a year by year basis) came in at 7.23%, after having declined to 6.89% in March 2012.  On the other hand the CPI index, which measures price increases on a rural and urban consumer consumption basis, reported a 10.36% increase, compared to 9.38% in March 2012 ( http://articles.economictimes.indiatimes.com/2012-06-13/news/32215461_1_gdp-growth-stagflation-headline-inflation ) .         

Furthermore, were on to the final and third component of the stagflation argument known as high unemployment.  At the time of this report, the current unemployment rate  is about 8.1%.  But a more accurate level of unemployment is reported by the BLS (Bureau of Labor Statistics) section U:6 of the BLS reports that the rate of unemployment  is approximately 14.5%.  In any exact month, both the size of the labor force and the number of people considered unemployed might change, because the figure takes into account both variables. Hence it is much easier to manipulate the figures and move people out of the labor force to make the figures appear smaller  (http://www.foxbusiness.com/economy/2012/06/08/ready-or-not-stagflation-is-here/) .  

The following chart below reflects the current seasonally adjusted SGS unemployment reporting rate,  calculated  with an adjustment for SGS estimated long term discouraged workers, who were represented out of official existence in 1994. The calculation is combined to the BLS estimate of U-6 unemployment, which includes short term discouraged workers.  The U- 3 Unemployment rate is the monthly headline number while the U-6 unemployment rate is the BLS broadest unemployment measure, including short term discouraged and other marginally attached works as well as those forced to work part time because they cannot find full time employment (http://www.shadowstats.com/alternate_data/unemployment-charts).

The following chart was retrieved from the Shadow Government Statistics website on June 14th 2012 and supports the argument behind the high unemployment up trend.  (http://www.shadowstats.com/alternate_data/unemployment-charts).

 

In addition, Wealth manager, financial advisor, and consultant to Fox Business News currently reported  that the labor force is at a 30year low, while only 63.7% of the population is working.  If you put this in simple terms, 36% of all people in the United States are not working.  The last time the labor force was reporting such low numbers of this stature were during the last period of intense stagflation that occurred in the 1970’s   (http://www.foxbusiness.com/economy/2012/06/08/ready-or-not-stagflation-is-here/).

In conclusion, stagflation can be seen as the worst of both worlds.  On the contrary, the current economic period has added a 21st century twist.  With the Fed consistently trying to stimulate growth via the pushing of short term rates down to near zero, affecting money market rates. As long as the current economy remains stagnate, the Fed will continue to keep rates at all time lows. This interesting concept leads to the parable that if stagflation does come into sight, it could be very damaging to money markets in the long term.  Furthermore, it is still very early to be concluded, but the stagnate economy supported by high gas prices at the pump and rising inflation could definitely put a nail on the stagflation coffin.

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