Inflation Stokes Stagflation Worries

February 24, 2008 12:08 AM
by findingDulcinea Staff
Rising oil and consumer prices are fueling fears that the United States is headed toward a combination of recession and high inflation. 

30-Second Summary

Data released on Wednesday show that 2008 will see both slower economic growth and higher inflation against the backdrop of a deepening credit crisis.

The Federal Reserve sharply lowered its economic growth forecast for 2008 on Wednesday while a Labor Department report showed inflation rose 4.3 percent since last January, its steepest increase in two years.

According to Michael Menatian, president of Sanborn Mortgage, the statistics prove that the Fed’s rate-cutting is not working. In fact, further rate cuts pose a danger to the economy as an influx of cheap money may boost inflation and trigger stagflation, wrote Larry Elliott, economics editor at the U.K. paper The Guardian.

Christina Romer, an economist at the University of California at Berkeley and a historian of Fed policy, disagrees. She told The Wall Street Journal that the stagflation of the 1970s will not recur as the Fed has managed the economy responsibly. Even though the central bank seems more concerned with remedying economic weakness for now, it said that it will consider reversing rate cuts when prospects for growth have improved, the Journal notes.

Stagflation occurs when an economic downturn overlaps with a period of high inflation. The phenomenon is difficult to deal with, as inflation and stagnation call for conflicting remedies.

According to the Journal, measures to combat inflation can be painful for workers and potentially dangerous for the politicians overseeing their application, which is why inflation got out of hand in the 1970s. To tackle high inflation in 1970s, the Fed under Paul Volcker increased interest rates dramatically, unleashing a deep recession in 1981–82.

Headline Links: ‘Rising Inflation Limits the Fed as Growth Lags’

Opinion & Analysis: Headed toward stagflation?

Reference: The Federal Reserve


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