Ah, the 1970′s. The hair was long, the music was great, and John Belushi was a rising movie star. Also unfortunately common were long gas lines (remember odd/even days?), high prices, high unemployment, and government price fixing with commodities. WIN, or otherwise known as Whip Inflation Now, was a popular grass roots movement to help control inflation by our Congress and our president at the time Gerald Ford. We know how this story ended.
During the 1970′s we also experienced a previously unheard of term called stagflation. Stagflation is when the inflation rate rises faster than real GDP. The word is a blend of the two words: stagnation and inflation.
Before this period, the always correct economists thought this event could never occur. How could a country be in a recession, yet also see prices increase? This blew the traditional Keynesian economic theory out of the water. Keynesian’s theory is mainly based upon slack in the labor force. This then determines wage inflation, which in turn increases prices for everything. So if unemployment is high (just like we are seeing today), we should not experience any measurable amount of inflation.
From the news reports we are seeing today, first quarter real GDP rose only 1.8% (July 2011 update: real GDP only grew 0.4%). This is while the annual inflation rate for that same quarter was 3.8%; the highest we’ve seen since 2008. Gold has reached an all time high of $1,800/oz. Gold’s evil stepsister, silver, will more than likely close near its all time high. Also in the news was an ‘unexpected’ increase in unemployment claims. Crude oil is currently at $85/barrel. We are getting reports from the likes of McDonald’s (MCD), Coke-Cola (KO) that they have been affected from the previous quarter’s food inflation and expect to increase pricing to keep up.
The dollar has continued its long term trend downward. Fed Chairman Ben Bernanke, in yesterday’s unprecedented press conference, stated the commodity inflation we are seeing is transitory. Ben also said the same regarding the slowdown in GDP. At what point does the trend in commodities and the dollar become a trend, and not transitory? We’ve seen inflation trends for the past two years, and the same applies to the dollar devaluation.
Are we going to experience stagflation in 2011? Since I’m more a believer of Austrian school of economics, I would have to say a resounding yes. For the curious, wikipedia has a good summary of stagflation and the various viewpoints.
July 2011 Update: First quarter 2011 GDP was revised downward from 1.8% to only 0.4%. Gold is now at $1623/oz. Unemployment is at 9.2%. Oil though is slightly under $100 a barrel.
Readers: What do you think? Do you think the inflation we are seeing is “transitory”, or something more permanent?
Disclosure: Long MCD and KO.