[T]oday's version of stagflation bears scant resemblance to the 1970s. In 1979, for instance, America's core inflation, which excludes oil and food, was rising at over 7% a year, while the economy grew barely more than 1%. Recent core inflation, at 2.2%, is only just above the central bank's comfort zone, while GDP growth is pretty close to the economy's sustainable rate. There is a tad of “flation”, in other words, but not much sign of “stag”. The euro zone, by contrast, has plenty of stagnation, but—despite the ECB's nervousness—there is little sign that its inflation is getting out of control (see article).But is the situation dangerous? Perhaps. The Economist argues that two crucial factors will determine whether the situation worsens.
1) will the Fed retain its credibility as an inflation fighter? Even with recent hikes in the interest rate, money is still very cheap. If the perception that long term inflation is under control ever weakens then people and institutions will change their behavior and this might precipitate a crisis.
2) will labor demands for higher wages have an inflationary effect? So far the weakness of organized labor and strong international competition have kept a cap on wage demands, but that could change in the future.
Neither of these, the article argues, is likely, so a return to seventies style stagflation is not probable. But then there is a third potential problem. Right now US consumer spending is fueling much of the world's economic growth. If that should slow it will create problemsfor nations around the world.
Interesting article. Read the whole thing here. In the American media economic reporting tends toward breathless hyperbole and partisan attacks. The Economist, by contrast, is a calm, reasonable, and moderate voice in the increasingly shrill din.
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