August 6, 2013

Stagflation Is Here: Today’s Unspoken Truth

Posted in Economy, Inflation tagged , at 7:02 PM by Robert Barone

By Robert Barone, Ph.D

“Stagflation” is a term coined in the ‘70s. It means high levels of inflation in a stagnant or sputtering economy. Sadly, while unrecognized by today’s media and political factions, Stagflation is a reality.

Ingrained Inflation
The following appears in the Federal Reserve’s (Fed) policy committee statement following the late July meetings:

[I]nflation between one and two years ahead is projected to be no more than a half percentage point above the committee’s 2 percent longer-run goal…

The fact that today’s Fed is actually espousing inflation is truly scary. Their traditional role is that of inflation fighter, not inflation enabler. Worse, the inflation measure used is significantly biased to the downside.

The accompanying table shows the impact of various levels of inflation over 10 and 20 year periods.

Dollars Needed to Purchase One 2013 Dollar in

Rate of Inflation 10 Years 20 Years
2.0% $1.22 $1.49
2.5% $1.28 $1.64
3.0% $1.34 $1.81
5.0% $1.63 $2.65
10.0% $2.59 $6.72

As seen from the table, even low rates of inflation lead to unacceptable results over time. But the 5% and especially the 10% scenarios are true wealth killers.

While the “official” CPI inflation rate appears low today, it is based on a flawed methodology, which, over time, has caused it to be close to meaningless as a measure of the cost of maintaining a standard of living. In 1983 and again in 1995/96, the calculation of the CPI was modified to reflect a much lower inflation rate. While this has saved the government a huge sum in entitlement costs, the recipients of such entitlements have suffered significant standard of living reductions (see the work of John Williams at Shadowstats.com and Ed Butowsky at Chapwood Investments for details on how the CPI understates true inflation).

Ed Butowsky and his firm, Chapwood Investments, regularly survey the top 500 items on which Americans spend their after tax dollars. According to Butowsky, “the CPI increase from 2008-2012 was a total of 10.2%, but our research has shown that for many cities, the cost of living increase was more than that for just 2012.” Look at the 10.0% row in the table to see the devastation that a continuation of this level of inflation will cause.

Stagnation
Inflation is bad enough, but it is worse when inflation is rapid and there is no economic growth. In July the “official” U.3 Unemployment Rate fell from 7.6% to 7.4%, not because there was a lot of job creation, but because of the way long-term discouraged workers are counted and because the labor force participation rate shrank to 63.4% from 63.5%. Had the labor force participation rate remained at the pre-financial crisis level (66%), the U.3 Unemployment Rate would be 11%! July’s U.6 Unemployment Rate, which recognizes the part-time issue, stands at 14%.

Non-farm payroll employment including both full-time and part-time jobs, is still two million below the ’08 peak. As played up on several blog sites (e.g. Zerohedge) and even in the mainstream media, of the 953,000 jobs created in 2013, 731,000 or 77% were part-time. Some blame this on the approaching full implementation of Obamacare. While proof is only by association, it appears that the part-time issue has worsened as the full implementation date draws near.

Stagflation
Inflation appears already ingrained with double digit rates common in most major metropolitan areas. With a biased CPI measurement, there is little media mention of rising prices. Unfortunately, both monetary and fiscal policies continue to promote higher inflation levels, while the economy continues to sputter, barely producing positive growth (if, indeed, even those numbers are to be believed). The labor market, the real measure of the country’s economic engine, continues in neutral, at best.

As in the 70s, today we have “stagflation.” Back then, political campaign buttons read “W.I.P.” – “Whip Inflation Now,” as the politicians recognized a need for action. Today, we are told that the labor markets are strengthening and that inflation is benign. Clearly there is little recognition of the stagflation issue and even less resolve to combat it.

Robert Barone (Ph.D., economics, Georgetown University) is a principal of Universal Value Advisors, Reno, a registered investment adviser. Barone is a former director of the Federal Home Loan Bank of San Francisco and is currently a director of Allied Mineral Products, Columbus, Ohio, AAA Northern California, Nevada, Utah Auto Club, and the associated AAA Insurance Co., where he chairs the investment committee. Barone or the professionals at UVA (Joshua Barone, Andrea Knapp, Matt Marcewicz and Marvin Grulli) are available to discuss client investment needs.
Call them at 775-284-7778.
Statistics and other information have been compiled from various sources. Universal Value Advisors believes the facts and information to be accurate and credible but makes no guarantee to the complete accuracy of this information.

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