- The Washington Times - Thursday, February 28, 2008


As U.S. economic growth has dramatically slowed down (crawling forward at an annual rate of 0.6 percent during the fourth quarter), inflation has been accelerating. The combination of these two unwelcome trends has ignited fears that the economy may be entering a mini-stagflation period, when prices increase faster than recent trends while economic growth becomes stagnant — or worse.

During 2007, major price indexes increased at their fastest rates in many years. Consumer prices, measured by the consumer price index (CPI), increased by 4.1 percent last year, the biggest jump since 1990. The producer price index for finished goods, which measures prices at the wholesale level, rose by 6.3 percent during 2007, the biggest leap since 1981. As the U.S. dollar’s exchange rate continued its descent for the sixth year in a row, the price index for imported goods soared 10.4 percent last year, the largest annual increase since the government began compiling its index for import prices in 1982.

As bad as 2007 was on the inflation front, January 2008 was even worse. During the 12-month period ending in January, consumer-price inflation accelerated to 4.3 percent; producer-price inflation increased to 7.4 percent; and import prices headed skyward at the rate of 13.7 percent.

Meanwhile, last week the Federal Reserve released the minutes of its monetary-policy meeting of Jan. 29-30. For the third time since the Fed publicly issued its first forecast for 2008 in February 2007, the central bank ratcheted down its projection of economic growth during 2008. Compared to a year ago, when the Fed forecast that growth would be between 2.75 percent and 3 percent during 2008, its latest projection calls for growth to be between 1.3 percent and 2 percent. The Fed shaved a half-percentage point off its October forecast after reducing its June projection. The Fed also raised its forecasts for consumer-price inflation as measured by its preferred inflation indicator, the price index for personal consumption expenditures, which, like the CPI, increased during 2007 at its fastest rate since 1990. The central bank also raised its estimate for the unemployment rate, which the Fed expects to rise from an average of 4.8 percent for the fourth quarter of 2007 to about 5.25 percent during the fourth quarter of 2008.

The Fed’s minutes were replete with depressing economic news, including observations that “economic activity had decelerated sharply in recent months”; “[c]onditions in the labor market deteriorated noticeably”; “the drop in housing activity had intensified”; “industrial production contracted in the fourth quarter”; “[business] spending on equipment and software rose at a sluggish rate in the fourth quarter”; “headline consumer-price inflation stepped up noticeably in November and December”; “strains remained” in short-term funding markets; “corporate bond spreads climbed to their highest levels since early 2003”; and “readings on consumer sentiment [in December] remained at relatively low levels by historic standards.”

It’s a wonder that the Fed still believes the economy can avoid a recession.

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