Stagflation redux: The seventies are back!

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Dig out your lava lamps and put on your pukka-shell necklaces. While some of the 1970's cultural excesses, like vomit-orange cars and pea-green appliances, might never return, one of the dominant cultural forces of the denim decade may be on its way back.

Stagflation.

Stagflation, which is on the official list of "most awkward portmanteaux ever," combines the words "stagnation" and "inflation." Essentially, it refers to an economy that is experiencing an economic slowdown or recession (generally measured in unemployment or wages), coupled with an inflation in the cost of consumer goods.

This is a fairly uncommon condition; typically, an economic slowdown carries with it a slowdown in inflation. Thus, a drop in income doesn't necessarily mean a major drop in the ability to purchase. With stagflation, however, consumers make less money while consumer goods cost more, which basically means that a lot of people end up eating a lot more Top Ramen.

In the 1970's, stagflation was caused by a combination of factors. Most economic historians agree that the failure of Peru's anchovy fishery, which drove up the price of fertilizer, was the first big step in the process. When agricultural losses were combined with an increase in the cost of gasoline, everything became a lot more expensive. Stagflation was a partial result.

Currently, the inflation-adjusted weekly earnings of workers in the U.S. are down 1.4% from a year ago. As an economic indicator, this suggests that the economy has slowed to a standstill or possibly recessed. On the other hand, prices of wholesale goods have risen 7.4% over the past year, the largest annual leap in 27 years. Retailers have absorbed some of this increased cost, but have passed a lot of it on to consumers. In fact, the prices of consumer goods have risen 4.1% over the past year, the largest annual increase since 1991. Many analysts have argued that the combination of increased prices and decreased wages suggests the return of stagflation.

As Robert Samuelson pointed out in today's Washington Post, there is a third condition for stagflation: the inflated cost/stagnated economy situation has to exist for an extended period of time. Currently, that is not the case, and we'll have to see if tax refunds and other government solutions will be able to help kick-start the economy.

Stay tuned...

Bruce Watson is a freelance writer, blogger, and all-around cheapskate. "Portmanteau" is his new favorite word.

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