What is Stagflation? What?...Stagflation.... Why is Stagflation bad?

What is Stagflation you ask?

The definition of Stagflation is starting to hit CNBC on a daily basis. Other news channels are casually mentioning "What is Stagflation"? Welcome back to the 70's.

Latest Stagflation Headline from AP

It was amazing to watch the congressional hearings today, Bernanke made the statement regarding stagflation below, as I watched all I could think is how I would love to play poker with this guy. No Stagflation...Your Bluffing.

WASHINGTON (AP) - February 28, 2008 -- Federal Reserve Chairman Ben Bernanke told Congress Thursday that the nation is "not anywhere near" the dangerous stagflation situation that prevailed in the 1970s.

With the economy slowing and inflation rising, fears have grown that the country could be headed for the dreaded twin evils of stagnant growth and rising prices known as "stagflation."

Worries Grow for Worse 'Stagflation'

Tuesday February 26, 6:09 pm ET

By Jeannine Aversa, AP Economics Writer

Worries Grow for Twin Evils of 'Stagflation' -- Stagnant Economy, Lost Jobs, Surging Inflation-------

As I research and put together this hub, I don't believe that many participants in the US Economy have any clue what this means and where we are headed. Stagflation is without a doubt the scariest of all economic terms, worse than even depression, that's right...Stagflation is worse and harder to cycle out of than depression. Please read on and understand that I prefer to be upbeat on the economy, but we must be realistic. Gold prices (commodities in general) rising, while the Fed is forces to aggressively slash interest rates.....Dangerous Combination.

For those who were born before 1980 Investopedia provides a bit of historical context: “[Stagflation is] not a good situation for a country to be in. This happened to a great extent during the 1970s, when world oil prices rose dramatically, fueling sharp inflation in developed countries. For these countries, including the US, stagnation increased the inflationary effects.”

Here is an article explaining the negative of reducing rates to help the economy. There is only so much a rate cut can do. What can happen is that inflation can take over and the economy won't recover. The average person is stuck in a place where things cost more and the economy is poor, so no new money will reach them. How can the economy recover if the average consumer is spending more money on gas, groceries and other essentials. The average person is left with little or no money to buy consumer goods. When the fed doesn't care about inflation and it is a real thing then the economy has no chance to recover because all of the limited spending in an economic slowdown goes to essentials. (The Fed's stagflation fear)

Central Bankers Confront A New Inflation Calculus - WSJ.com: But several factors, including the surge in demand from emerging-market heavyweights like China, are set to keep commodity prices high during this downturn, putting policy makers and businesses in a pickle reminiscent of the stagflation-plagued 1970s.

Inflation angst is widespread. Italian Prime Minister Romano Prodi this month appointed an inflation czar, a post known as Mister Prezzi (Mr. Prices), to keep an eye on rising consumer costs. Chinese Premier Wen Jiabao has said persistently high oil prices, rising agricultural-product prices and financial instability pose new problems for the global economy.

Developing countries are particularly vulnerable. "There is a real risk of stagflation in these countries, with drastic consequences," said Columbia University economics professor and Nobel laureate Joseph Stiglitz in an interview in Davos. Food and energy make up a far larger share of price indexes in developing countries, where many people lack the wherewithal to absorb higher prices."

Record Stagflation, Foreclosures & Home Price Declines

Fed funds futures indicate a 76% chance of a 50 bps cut, 24% on a 25 bps cut.

Economist estimate: for each dollar lost in home price or stock values... American consumers spend 5 cents less.

Cost driven inflation and slowing growth, the S word...

Japanese Consumer prices, excluding fresh food, rose 0.8% in December, the fastest pace in more than nine years and double November's 0.4%.

Corporate profit and retail sales, both fell for the first time in five years in Q307, bankruptcies rose to a four-year high...

while the ratio of jobs available to each applicant fell to a two-year low. Wages have not risen and consumer spending is eroding.

US Foreclosures Increase 75% in 2007...

A total of 215,749 foreclosure filings were reported in December, up 97% YOY. Q4 total at 642,150 filings up 86% YOY;

2007 total of 2,203,295 foreclosure filings, up 75% from 2006.

S&P/Case-Shiller home-price index: The 11th consecutive month of negative annual returns & a full two years of decelerating returns.

Prices in 20 American cities fell 7.7% in November from a year ago, the biggest drop since the 20-city gauge was started in 2000.

The 10 city composite had a 8.4% annual decline, a new record low. Leaders: Miami -15%; San Diego & Las Vegas -13%;

only 3 increasing Charlotte +2.9%, Portland +1.3% & Seattle +1.8%.

Robert J. Shiller, Chief Economist: "We reached another grim milestone in the housing market in November.

Not only did the 10-City Composite post another record low in its annual growth rate,

but 13 of the 20 metro areas, each with data back to 1991, did the same. If you look at the monthly figures, every MSA has now posted three consecutive monthly declines.

Eight of these MSAs, in addition to the two composites, have had more than 12 consecutive months of falling prices.

Fourteen of the 20 MSAs, in addition to the two composites, recorded their single largest monthly decline on record in November."

Is 70's Stagflation returning? For a hint look at Oil and Gold.

What is Stagflation? Here is a basic and simple answer to the question. Sluggish economic growth coupled with a high rate of inflation and unemployment. Usually associated with a declared "recession"

What is Stagflation? Are we in a Stagflation economy?

GDP growth slowed to 0.6% in Q4 2007: The U.S. economy braked sharply last autumn, pulling growth for all of 2007 to its lowest speed in five years as the housing slump took a heavy toll.

Gross domestic product rose at a seasonally adjusted 0.6% annual rate October through December, the Commerce Department said Wednesday in the first estimate of fourth-quarter GDP.

Aside from the housing slump, slowing consumer spending, inventory liquidation and lower overseas sales restrained the economy. The 0.6% pace wasn't only much slower than the third-quarter's racing 4.9%, it was far below expectations on Wall Street. The median estimate of economists surveyed by Dow Jones Newswires was 1.2% GDP growth during the autumn months.

Inflation gauges within Wednesday's GDP data indicated acceleration in prices. The economy grew 2.2% in 2007, the lowest rate since 1.6% in 2002. GDP in 2006 had increased 2.9%.Fed cuts interest rates again - this time by 50 basis points to 3.0%: The Federal Reserve lowered its benchmark interest rate by half a point to 3 percent, the second cut in nine days, and indicated its willingness to do so again to prevent a U.S. recession.

``Downside risks to growth remain,'' the Federal Open Market Committee said in a statement after meeting today in Washington. In a reference to the volatility of the past five months, the Fed added that ``financial markets remain under considerable stress and credit has tightened further for some businesses and households.''

The dollar tumbled and Treasury notes weakened after the decision as traders anticipated another reduction at the Fed's March meeting, if not before. The cumulative reduction in rates since Jan. 22 is the fastest easing of monetary policy since 1990. GDP data often gets revised and I think that in the months to come, we'll see that Q4 2007 actually saw an economic decline.

The Fed's rate cutting is almost blind panic. The forex markets dumped the US dollar as soon as Bernanke made the announcement. At issue here is whether or not the contraction of the US economy will have a substantial deflationary effect. All economic contractions result in some form of deflation. Yet the long-term decline in the US dollar (which is now, yet again, within spitting distance of a record low) has an inflationary effect. When the two are combined - contractionary deflation added to inflationary devaluation - what will the net result be?

My bet is that the net result will not just be inflationary, but painfully inflationary. I use as my basis here the experiences of other nations throughout economic history who have suffered currency devaluations and were forced to go through painful recessions that were accompanied by high inflation. I don't believe that the US is somehow different to other nations in this regard.

What I am therefore predicting in 2008 is a period of painful stagflation for America - a combination of economic contraction and inflation which will only be solved when the Fed raises rates and plunges the economy into a double-dip recession.

Hope this helped answer the question "What is Stagflation" and given you a better idea of why stagflation is so bad for the economy.