Economists Start Muttering the S-Word

Since consumer spending eased up a bit in February (and January, for that matter) and the Commerce Department released data Friday showing inflation is advancing, some economists have broken out the MacroEcon 101 textbook and trotted out a word used only when Jimmy Carter is in the White House: stagflation.

Stagflation, that ugly economic combination of price inflation and stagnant economic growth, has long been a popular warning word for economists when trying to scare the wits out of the American public.  Nevermind the fact that it’s only truly happened once, in the aforementioned Carter Period.

But the Commerce Department did release numbers today that signal an upward tick in inflationary pressures.  The core personal consumption price index was up 0.3% in February, which is high, but in line with economists’ predictions.  Some good news, though: January’s increase was revised down from 0.3% to 0.2%.  But then some grim news: with the two first months of 2007, core inflation is up 2.4% for the year (measured year-over-year).  This is pretty far from the Fed’s upper limit of its comfort zone of 2.0%.

On the heels of other economic reports on consumer spending, the Commerce Department also said in its report that inflation-adjusted consumer spending – the most significant input to GDP — rose only 0.2% in the month after another weak reading of 0.3% in January.

So you might say consumer spending is stagnant and inflation is on the rise.  Enter the S-word.

New York Times resident economist Paul Krugman first used the word in August 2005 to predict the economy’s direction.  Oddly, many Indian economists have been using the word to describe the current U.S. economy as well.

But stagflation is a very specific, and extremely rare, condition that is not easy to predict.  Overall, the economy is expected to grow at a rate of around 3% this year.  While no one will be calling this a “blistering” or even “healthy” rate, it’s still significant growth.  So the stagflation talk may just be that: talk.