Is Stagflation Back in the U.S.?

Slow economic growth, rising inflation, and rising unemployment equal "stagflation."

Stagflation has historically been a tough economic predicament, and hard to get out of ... could it be back in the U.S., and where would that leave us today (e.g., interest rates)? While stagflation didn't seem to be a consideration for Fed chair Janet Yellen at Jackson Hole last Friday, none other than the "maestro," former Fed chair Alan Greenspan, remarked just one month ago:

What I’m concerned about mostly is stagflation, meaning I think we’re seeing the very early signs of inflation beginning finally to pick up as the issue of deflation fades, we’re just in a stagnation state.

A quick look at current U.S. growth, prices, and employment

For the last two years, U.S. economic growth has been in decline, without even subtracting all the post-2008 stimulus and quantitative easing.

Most of the 99% and below are well aware of a stagnant economy, the 1% aren't investing in new production capacity like they used to, and everybody seems to be in search of yield (with ever-increasing inattention to risk).

For the last six years U.S. implicit prices have been on the rise again, no matter what the much-touted official inflation rate has been.

The inflation rate itself bottomed out at about 0% in 2015 and has been on the rise ever since, perhaps officially on the way to surpassing the Fed's official 2% target.

The more common consumer and personal consumption expenditure price indices bear a similar story. Keep in mind this is with prolonged low U.S. gas and oil prices reflective of recent U.S. production (e.g., fracking) and increased green economy efforts (e.g., renewable energy). Americans of any age are quite familiar with increasing educational and medical expenses, and lower quantities for similar historic prices at the supermarket. Moreover, both main U.S. presidential candidates are calling for infrastructure spending, which has historically driven inflation, and the potential for such fiscal stimulus has recently caught the attention of the fixed income market.

For the last eight years, U.S. labor participation has been in steady decline no matter what the commonly-touted unemployment figures are.

While many have been slow to realize and openly speak of this underemployment and where U.S. jobs are at, 10-year wage stagnation is much discussed, and for the last two to three years, even capital markets pros have suffered 20% to 30% headcount reduction in the front office. The electorate sure seems to get there's a problem with jobs, but not so the Fed:

Although the unemployment rate has remained fairly steady this year, near 5 percent, broader measures of labor utilization have improved.

How does this comport with the above eight years of declining labor participation?

Stagflation. Now what?

All politics are local, and anecdotal evidence is difficult to quantify, but the above numbers are hard to argue with—the U.S. seems to have entered a stagflationary period.

So nothing on stagflation (publicly) at Jackson Hole, but to what extent, if at all, is it on the mind of our current Fed chair? Maybe millennials should start reading up on stagflation, and all of those up for (re-)election in 2016 should start telling us what they're going to try to do about it. What do you say about it?

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