Slipping into Stagflation

Why repeating Carter's mistakes could wipe out Obama's hopes for reelection.

Although the Federal Reserve chairman and a few Federal Reserve Bank presidents believe the risk of inflation is nil, rising prices for food and gasoline are slapping consumers in the face. This comes at a time when the economy is still struggling to right itself.

Whispers of likely stagflation—the mix of rising prices with stagnant growth and high unemployment—are heard across the land, as worrisome memories of the depressing stagflation of Jimmy Carter days flow back to mind.

Could the Obama era duplicate the dreary years of Carter’s fail administration?  Too many likenesses are already evident. During the Carter Presidency, 7.3 million people were unemployed. Today, 13.5 million are unemployed. The rate of unemployment in Carter’s term was over 7 percent. With Obama in office, we have seen the rate up to 10 percent.

A bitter stalemate between Republicans and Democrats over how to attack the $14.3 trillion debt crisis appears likely. This, together with Obama’s threat of a tax hike, threatens economic recovery and could continue the high unemployment rate.

The Federal Reserve is in charge of monetary policy, which it guides by changing interest rates businesses and consumers must pay. The Fed has tried to hold unemployment down by keeping interest rates near zero. It attempts to target a non-inflationary growth rate of GDP.

But the Fed has been encouraging future inflation by its policies to print more money, thereby reducing the worth of the dollar. The way it does this is by buying bonds from banks. The Fed has been buying bonds since early 2009. It can electronically credit money to the bank accounts of sellers. They, then, sell government securities or mortgaged-backed securities to the Fed. The Fed isn’t printing dollar bills. But it is creating money electronically that wasn’t in the system before. So, in effect, it is printing money. Likewise, Obama has cut into the value of the dollar by spending recklessly.

Policy makers on the Federal Reserve’s Open Market Committee are split over inflation risks. Fed bank presidents, such as Charles Plosser of Philadelphia and Richmond’s Jeffrey Lacker, have said the Fed may well need to raise interest rates this year. On the other side, Fed Vice Chairman Janet Yellen and the Federal Reserve Bank of New York’s president William Dudley have said rates may have to stay low for a longer period.

The Consumer Price Index (CPI), released April 15 increased 0.5 percent in March for urban consumers, the Bureau of Labor Statistics reported. Seems tiny; but the index rose 2.7 percent over the past 12 months for the all-items Index, the largest increase since 2009. “Gasoline and food prices continued to rise and together accounted for almost three quarters” of the “all Items” increase in March.

The index for gasoline posted its ninth consecutive increase in March and has risen 14.4 percent over the last three months. Try telling Americans who have to empty their wallets to fill their gas tanks that inflation isn’t already here.   The index for food eaten at home continued to climb in March, rising 1.1 percent “as all six major grocery store food groups increased," the CPI report said. The cost of food eaten at home is up 3.6 percent, with some items soaring way past that.

The Associated Press April 16 reported food prices at the wholesale level rose in March by the most in 36 years, forcing stores and restaurants to pay more for vegetables, lettuce, meat, and dairy products.

The household energy index crept up as well, with advances in fuel oil and electricity indexes more than offsetting a decline in the price of natural gas. The index for shelter—despite the continuing housing crisis—even rose slightly. Medical care was more costly. Several transportation indexes increased significantly, including new cars, used cars and trucks, and airline fares.

When core prices rose in February, the dollar weakened. Investors feared that inflation would continue to creep upward. This, in turn sent commodity prices higher. Silver and gold benefited. And cotton prices jumped on expectations of stronger global demand. Other agriculture products, from corn to soybeans, rose in price.

The poor economic record of the Carter years, especially the combination of high inflation—going over 13 percent one year—and high unemployment, led to his defeat in 1980. Stagflation could wipe out Obama’s hopes for reelection.

If increases in food, energy, and commodities persist, this could lead to an increase in inflation expectations, which occurred in Carter’s presidency. The expectations could become self-fulfilling. When businesses’ costs rise, they hike up prices. When workers feel they are falling behind, they seek more rewards. “Ultimately, that leads to an upward spiral, which central bankers might have to battle with higher interest rates,” The Wall Street Journal said in an April 16 story.

The Obama unemployment rate, although down from its high, still includes a labor participation rate at an all-time low. His policies have helped cause the loss of three million jobs in the nearly two and a half years of his reign. The recent job gains haven’t led many people, who stopped looking for work during the height of the recession, to start looking again. The real unemployment rate is undoubtedly much higher than 8.8 percent. The jobless rate for blacks and Hispanics continues to rise as well.

Barack Obama may well win the unwelcome award of being the worst president since Jimmy Carter. In fact, he may even top Carter’s abysmal record, particularly if stagflation sweeps over us.