From January 2007 to January 2008, the index for finished goods moved up 7.4 percent. Over the same period, prices for finished energy goods climbed 22.6 percent, the index for finished consumer foods rose 8.3 percent, and prices for finished goods other than foods and energy advanced 2.3 percent. For the 12 months ended January 2008, the index for intermediate goods increased 8.8 percent, and prices for crude goods jumped 31.3 percent.
What's happened in the commodities space, particular in food stuffs, has a direct impact on inflation expectations," said Dan Shackelford, a T. Rowe Price portfolio manager whose team manages $14 billion in bond assets. "We should care about what's happening, not only to gasoline prices but what's happening with corn or stuff that ends up on the grocery shelf or at T.G.I. Friday's," he said.
In the United States, the steady drumbeat of higher-than-historic consumer inflation, overlapping with mounting evidence of a slowdown or possible recession, has reignited fears that the nation is flirting with a return to 1970s-style stagflation. As Tony Crescenzi, the influential bond-market strategist at Miller Tabak & Co., put it in a research report this past week, "Inflation has now become the new bogeyman, adding to many other concerns."
Of course, others are not so sure that we are going back to the stagflation 1970's, even when they worked back then, as Richard Berner relates more opinion than analysis in an Morgan Stanley article:
To be sure, there are similarities to that bygone era, and we are revising our 2008 inflation forecast higher by almost a full percentage point, from 2.2% to 3%. As then, soaring energy and food quotes are clear culprits today. Crude prices have touched $100 and are unlikely to retreat significantly. Quotes for grains and other foodstuffs have jumped by anywhere from 10% to 250% from a year ago, and the supply/demand balance favors further increases. Moreover, as in the period when President Ford handed out WIN buttons and Arthur Burns was Federal Reserve Chair, it’s not just energy and food; the persistence of inflation lately has been broad-based. Steve Roach and I worked together under Burns in the 1970s and watched with alarm as monetary policy contributed to an era of stagflation (see “The Curse of Arthur Burns,” Global Economic Forum, October 22, 2004). It’s now clear that bringing inflation back down will require more slack in the economy and more time than we thought previously. But in my view, the similarities with the 1970s are more superficial than real. Here’s why.
First, let’s focus on global forces. By now it’s a commonplace, as articulated by former Fed Chairman Alan Greenspan, that globalization for much of his tenure was a disinflationary force, but that Ben Bernanke is unlucky... when global forces are turning inflationary. I think that view overstates the influence in both directions. While globalization almost surely reduced US inflation over the past decade, domestic forces —
inflation expectations, the extent to which costs from all sources are rising, and the degree of slack in the economy that shapes companies’ pricing power —still dominate the inflation prognosis. Conversely, as in the 1970s, US policymakers must now be attentive to the potential for global forces to boost inflation, but I think the influence will be small. Unlike in the 1970s, that’s because global companies now tend to “price to
market,” absorbing the effects of currency or import price changes in margins; in other words, the “pass-through” from such cost increases has declined (see “Globalization and Inflation,” Global Economic Forum, June 19, 2006).
Nonetheless, two global factors are pushing inflation higher today. First, rising energy, food and commodity prices – the product of still-strong global growth and limited gains in supply – are
boosting overall inflation. Energy prices rose by 20.4% over the past year, while retail food quotes rose by 4.9%; the latter is the fastest pace in nearly two decades... If Brent averages $90/bbl this year, US retail gasoline prices (all grades) seem likely to average about $3.25 for the year, and in the spring driving season could hit $3.50. Likewise, the jump in wholesale food prices has yet to show up fully in retail products, and a continuation of 4-5% food price hikes seems highly likely for the balance of
A rise in import prices apart from food and energy — the product of a weaker dollar and gains in non-dollar import prices — is a second current source of inflation pressure...But there are lags between the time the economy weakens and the degree of pass-through declines, and slack hasn’t yet increased by enough to mute the impact of such price hikes by as much I thought a few months ago.
And import prices have also risen over the past few months by a bit more than I thought — not solely because of the weaker dollar but also because costs have escalated. The upshot: While pass-through has been incomplete, import price hikes have given a lift to US inflation...
Domestic factors also have worsened the inflation picture. Inflation expectations, partly reflecting the global forces mentioned above, are moving higher...
Richard Berner does alot of talking, a lot of thinking, tending, assuming and talking around the inflation vs. stagflation problem.
I don't feel we are going to grow much at all, and certainly not in relationship to the burning-up market in China or India, unless Barack Obama has some economic magic wand to undo several years of economic Russian roulette we have been playing.
Meanwhile prices will rise, people will tighten their belts, the housing sector will only get worse, and of course, a few top cats will reap huge rewards.
The signs are just not getting any better.